No event in recent memory has led to the crazy rollercoaster in the stock market like the pandemic of 2020. Despite losses in some industries of as much as 40% many markets have recovered fully and even blown into new records, specifically internet and tech stocks. However, a key segment in both the DJIA and S&P 500, including bank and oil stocks, have had a rough few months and are still trailing behind February highs. Still, the recent Chevron acquisition may spell some good news.
What Does the $5 Billion Chevron Acquisition Mean for the Oil Industry? Chevron’s recent all-stock purchase of Noble Energy is a positive sign for the oil industry and hints at overall market recovery and an increase in demand.
Chevron’s acquisition means a whole lot for both the company and for the market as a whole. Read below to find out the details of the deal, what it means for the oil industry, as well as what doubters and bears are warning about.
Chevron’s $5 Billion Purchase Of Noble Energy
Andrew Wolstenholm wrote a report in 2009 titled “Never Waste a Good Crisis.” In the face of a recession, record-high unemployment numbers, and a tragic pandemic, these words sound insensitive but they are as true now as they were in 2009. In fact, given the record-low interest rates and falling revenues, this is the ideal time for large companies with piles of cash to scoop up some undervalued assets.
In an all-stock transaction, Chevron (which is one of the largest energy companies in the world) acquired Noble Energy for $5 billion. Chevron also took on the $8 billion in debt that Noble Energy accumulated throughout the years valuing the entire transaction at $13 billion. The offer valued Noble at a cool $10.38 per share, significantly higher than March lows of $3.02 and a 7.5% premium when the bell rang on July 17, three days prior to the announcement.
This purchase comes in as the largest oil deal since the start of the pandemic and the largest U.S. energy deal of 2020, which most analysts see as a good sign. This was a much-needed win for Chevron considering it lost in an earlier bidding war for Anadarko Petroleum to Occidental Petroleum. Of course, receiving a 1 billion dollar breakup-fee doesn’t really seem like too big of a loss.
Is This Good News For Chevron?
Crude oil futures dropped below zero into double-digit negative numbers in May because of a complete lack in demand, stationed tankers, and basically no drilling or fracking going on. Chevron stocks (CVX) also took a large hit and have had a hard time recovering to January highs of $121.43. That being said, Chevron was founded in 1879 and since then it has grown to a 200 billion dollar company (current market cap $168.27 billion) with tons of cash and assets. Among its many acquisitions over the years, including Texaco and Atlas Energy, the Noble Energy purchase fits right in with its prestigious portfolio.
Sure Noble energy has accumulated large amounts of debt compared to its yearly revenue, but it’s also a smart buy for Chevron and a huge deal for the oil giant’s bottom line. Here’s why Chevron wins big:
– Low-cost proved reserve purchases: Chevron acquires Noble Energy’s large oil reserves at just $5 per oil-equivalent barrel. This will add 18% to Chevron’s 2019 year-end proved oil and gas reserves.
– Provides de-risked acreage in the DJ Basin and 92,000 acres in the Permian Basin: This enlarges Chevron’s presence in the U.S. specifically in Colorado, Texas, and New Mexico.
– Annual cost savings of $300 million: A huge part of the deal is that Chevron gets around $300 million in pretax synergies from cost-related savings.
– Strengthened position in the Middle East, Africa, and Eastern Mediterranean: Chevron also gets Noble Energy’s offshore assets in Israel and smaller developments in Equatorial Guinea.
The high-quality assets at low costs mean a great deal for Chevron and will likely propel the company into new highs in the near future. That being said, Noble Energy also got in good on the deal. Apart from getting saved in an otherwise uncertain market, shareholders of Noble will also own approximately 3% of the combined company shares. Everyone wins!
Is This A Good Sign For Markets?
The oil industry has been hit hard and despite the lifting of lockdown restrictions, a noticeable pickup in traffic patterns, and deals being made across OPEC and allies crude oil futures are treading around $40 per barrel and there doesn’t seem to be any short term sign of growth. Still, this purchase is the only one of its kind since the pandemic and at least it sets a benchmark for future acquisitions in the 2020 recovery wave.
Other large energy companies should take note of Chevron’s flexible balance sheet and high cash reserves and attempt to seek out similar undervalued high-asset companies to acquire and merge with. With interest rates remaining low for the foreseeable future it won’t be surprising to see more and more of these deals being made.
Still, a number of bearish investors and doubters remain skeptical about the oil industry, markets at large, and even the Chevron-Nobel agreement. The main argument here is that a single $5 billion purchase won’t be enough to uplift CVX and boost Chevron’s bottom line, and it doesn’t allow for enough time to have any major impact on Chevron’s earnings later this week. On top of that, many remain bearish on crude oil futures as the price per barrel has a hard time breaking the $41-$42 barrel. With air travel down and many still working from home, the demand for oil also remains low.
In all, the Chevron deal is definitely a strong long-term win. The company has acquired some high-value assets at below market value and it has added to its domestic and international portfolio and acreage. While we still have to wait a few months to see the full fallout of the lack in oil demand, right now this acquisition spells good news for markets and the oil industry.