The current year has been shaping up as the worst in decades for oil and gas mergers as the deep uncertainty surrounding the sector killed Big Oil’s appetite for acquisitions. Since the epic oil price crash, Wall Street has opined that the majority of Big Oil executives will be too gun-shy to pull the trigger on the numerous debt-ridden companies and hordes of others facing bankruptcy. But perhaps Wall Street underestimated the allure of a huge pool of assets ready for the taking for cents on the dollar.
After a big lull during the first half of the year, the oil and gas M&A space has suddenly come to life after Chevron Corp. (NYSE:CVX) and residential solar company Sunrun Inc. (NASDAQ:RUN) announced big takeovers that befit their status.
On June 20, Chevron announced that it had agreed to purchase Noble Energy (NASDAQ:NBL) in an all-stock deal valued at $5B.
Meanwhile, Sunrun has announced that it will acquire rival Vivint Solar (NYSE:VSLR), in another all-stock deal valued at $3.2B including debt.
And now there’s a growing feeling that the two mergers could open the floodgates for similar deals especially in the shale sector.
Chevron Buys Noble Energy
Chevron has agreed to buy Noble Energy for $10.38/share, a mere 7.6% premium over Noble’s Friday closing price of $9.65. In effect, Noble shareholders will get 0.1191 shares of CVX for each share of NBL held.
Although the deal appears cheap for Chevron shareholders at face value, the deal value actually swells to ~$13B when you include Noble Energy’s hefty debt load. Nevertheless, Noble was down more than 60% in the year-to-date before the deal was announced so Chevron still managed to avoid overpaying for the company.
In fact, the deal has mostly been well received by Wall Street and shareholders alike with CVX shares having gained 6% since the deal was announced.That’s rather unusual since shares of the acquiring company more often than not tend to fall after a deal. There are a couple of plausible reasons why Chevron’s purchase ie being viewed positively.
First off, buying Noble will enhance Chevron’s presence in the pivotal Permian Basin by adding 92K of Noble’s largely contiguous and adjacent acres. It will also enhance its position in the Colorado’s DJ Basin as well as add assets in West Africa and the eastern Mediterranean.
Second, the cost synergies involved in the deal are quite significant. CVX has announced that the combined entity will generate $300M in cost synergies per year before tax and will also be accretive to earnings, free cash flow and book returns just a year after the deal is consummated.
Third, and perhaps most significant, is that Chevron is not taking on any debt to finance the deal. Chevron famously dodged a big bullet after walking away from a bidding war for Anadarko Petroleum last year. Occidental Petroleum took on massive debt to finance the $55B deal and has since struggled under a swelling mountain of debt.
By Alex Kimani