Chevron Takeover of Noble Energy

This essay discusses the acquisition of Noble Energy by Chevron, the current state of the oil and gas industry, the rationale behind the acquisition, and the analysis of the deal structure. It also explores the economic backdrop, risks, synergies, and market and theoretical valuations.

CHEVRON TAKEOVER OF
NOBLE ENERGY

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
ESSAY ............................................................................................................................................1
Background..................................................................................................................................1
Current State of Oil and Gas Industry..........................................................................................2
Present Analysis of rationale of Chevron acquiring Noble energy .............................................3
Analysis of deal structure with the reference to market and theoretical valuations. ..................6
CONCLUSION ...............................................................................................................................9
REFERENCES..............................................................................................................................11

INTRODUCTION
Acquisition of the Noble Energy by Chevron has provided low cost, attractive
underdeveloped resources and proved resources will enhance already advantaged upstream
portfolio. The Noble Energy bring the low capital, cash generating off shores asset in the Israel is
strengthening the position of Chevron in Eastern Mediterranean. Noble Energy has also
enhanced the US unconventional position having de-risked acreage in DJ Basin and the 92000
largely contiguous and the adjacent acres in Permian Basin. As per current trend oil and gas
industry has shrunk rapidly and it has fallen down to 2.6% in 2019 which was 16% in 2008. The
demand has fell significantly due to decarbonising world focusing over the electric and bio
resources. The international economic growth has also decreased the demand. Essay will discuss
about the current financial environment and issues relating to the acquisition of Noble Energy by
Chevron.
ESSAY
Background
Chevron is American multinational energy company. It is successor of company of the
Standard Oil headquartered in the San Ramon, California and is currently active in around 180
countries. Company is also engaged in each aspects of natural gas, oil, hydrocarbon exploration
and the refining, production, transport, marketing, chemical sales and manufacturing and also the
power generation. Company is ranked 15th in Fortune 500 with yearly revenue of the $146.5
billion and has market valuation of around $136 billion. In 2020 it was ranked 61st for largest
public company in world. In the year 1911, federal broke the Standard Oil in several pieces
under Sherman Antitrust Act. Among them one piece became Chevron and part of Seven Sisters
that dominated oil industry of world in 20th century (Eran, 2019). The company owns Standard
Oil trademark in sixteen states of south eastern and western United States. On 10th October, 2000
Texaco announced purchase share of General Motors in the GM Ovonics that manufactures
NiMH batteries for the electric cars. On 15th October 2000, Chevron made announcement for
acquisition of the Texaco in deal of $45 billion which made it second biggest oil company of US
and 4th largest publicly trading oil company having market value of around $95 billion. As in 31st
December 2018 company had 48600 employees in which 51% were employed in the US
operations. The primary gas production and exploration operations are in US, Nigeria, Angola,
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Gulf of Mexico and Kazakhstan. In 2018 upstream business of company reported net production
worldwide of 2.930 million barrels a day.
Noble Energy is company engaged in the hydrocarbon exploration that is headquartered
in the Houston Texas. It was previously recognised as the Noble Affiliates, Inc till 2002. In 2018
it had oil barrels equivalent to 1929 million. Company had total proved reserves of natural gas
62%, liquid natural gas 14% and petroleum 24% (Hemel and Nielson, 2017). The primary
holdings of company were in Denver Basin / Wattenberg Gas Field. Company owned 74000 of
developed acres and around 111000 of underdeveloped acres in 10 & 90 miles of offshore under
water depths in Israel that range from 700 ft to 6500 ft. In 2020 October, Chevron corporation
acquired the Noble Energy .
Current State of Oil and Gas Industry
Gas and Oil industry is familiar with high and low of the economic cycle. As per recent
study of World Bank for projections of major commodity prices is been result of the several
factors like production cut of crude oil that OPEC and the Non OPEC countries implement from
the 2016, for fostering upward trend in the prices of crude oil, constant increase of US oil & gas
productions. It mitigates the increase and force price down. In 2017 OPEC countries decided for
reducing the productions by 1.8 million barrels daily for supporting prices and recovering
investments. The oil industry has shrunk significantly in the recent years as energy stocks were
made of 16% in S&P 500 companies which is only now 2.6%. USA is continuously increasing
the supply of hydrocarbons with the boom of production and extractions of the unconventional
hydrocarbons. Average price of the crude oil increased from $46 to $76 in 2017- 2018 while in
November it dropped again to $62 per barrel (McGiven, 2017). It is forecasted that it could fall
to 41.43 in coming years because of ongoing oil crisis.
Decrease in demand by Decarbonising world
Due to shift in the global energy mix from the fossil fuels to the renewable. The energy
transformation and green deal is gaining momentum and leading to formation of new ecosystems
and also emergence of new technologies. The development help in growth of renewable,
development of energy carriers, improving energy efficiency, reducing emissions and also
creating the new carbon markets. But this is significantly impacting the demand of oil. It has
imposed great challenge for the oil industry to survive in the world going green and electric.
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Contraction of oil demand due to spread of COVID-19 and the dissolution of OPEC
agreements has generated shockwaves through energy & financial markets. Government around
world grapple with sever economic crisis and oil and gas industry is focusing to survive in
critical price cycle. The government policies focusing over lower emissions are laying pressure
on companies to develop and adopt technologies with lower emission and also creating
substitutes of such processes. Increasing carbon tax and electric vehicle trend has reduced the
demand for oil and gas industry which is to grow further (Shojaeddini and et.al., 2019). The
increasing costs and reducing products are also laying pressure on the companies to adopt for
sustainable energy and power options for their processes. Initiatives of government for
environment protections has increased the demand for natural gas further decreasing demand and
causing OPEC to cut productions.
The COVID 19 has further worsened the situation of oil industry. The prices per barrel
has dropped to $25 per barrel which is 18 year low. Traders state that demand has fell to 10 -20
million per day. The decline in jet fuel consumption by around 20% which is major consumer.
The supply is to plunge by record 12mb/d after OPEC+ that forged output deal for cutting down
production by the 9.7 mb/d. The international weakening economic growth has also decreased
the demand. The hydroelectric power is giving strong competition as it costs 0.05/kwh where oil
& gas costs 0.05 – 0.15/kwh. Following the international lockdown decreasing demand has fell
the prices of brent crude to $19 from $70 in 2019 December (Gómez and Avendaño, 2018). The
demand will be recovered in next year however it will not see expected growth due to demand
for sustainable fuel options.
Present Analysis of rationale of Chevron acquiring Noble energy
Strategic Rationale
Strengthens market position: This is the big deal after the crash in the oil prices crashed
from the month of March 2020 for 4 months. The emergence of coronavirus pandemic has
resulted into huge decline in the demand of the oil which has putted pressure on the oil
companies with huge debts (Chevron Announces Agreement to Acquire Noble Energy. 2020).
Though relatively but the Chevron and Noble deal depict as a sign of confidence as it will make
the financial position of the company much stronger. This deal will help in gaining stronger
market under the times of uncertainty as the Noble Energy assets will help in enhancing the
Chevron's portfolio in US onshore and other international market.
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Natural gas portfolio shift: It will help in satisfying the investors in relation to the ESG concerns
in the production and transportation of the crude oil and natural gas. Israel is focusing on the
natural gas as the clean alternative which will result into portfolio shift of Chevron as Israel is
having large scale Eastern Mediterranean position which will cause diversification in the
Chevron's portfolio and is also expected to generate strong returns and cash flows with the lower
capital requirements.
Growth opportunities for Chevron shareholders
The cost effective opportunities attained from this acquisition will enhance the capital
flexibility along with the ability to generate strong cash flow. This will turn out to be Chevron
operational strength and the combination of this will create value for the shareholders in terms
growth opportunities and return.
Risk reduction of Noble shareholders
This deal will bring in opportunities for the Noble to join a globally admired and
diversified leader in energy sector with the top tier balance sheet and strong shareholder returns
(Blackmon, 2020). This will reduce the risk of cost from the company and drive capital
efficiency gains and thus reducing the cost structure.
Economic Backdrop
Buyer's market: This deal will provide Chevron a presence in the Israel waters where the
Noble has identified the large natural gas in the recent years. But, these assets might not create
huge profits for Chevron in few years as there is a glut of gas in the nearby Europe (Krauss,
2020). The Noble company struggled to make profit at the price of nearly $40 barrel. But the
price has been recovered in some way in the recent years by the current situation of pandemic
persistence along with the recent rise in the infection in Texas and other states has led to the
conclusion that the price of oil might not climb high anytime soon. Even before pandemic, the
growing number of wells were unprofitable. Based on Novel Energy has proved reserves at end
of the year 2019 has result into adding approximately 18% to the Chevron in the year 2019 in its
proved oil and gas reserves with an average cost of lower than $5/boe and along with this, almost
7 barrels of the risked resources for lower than $1.50 per boe.
Risks
There has been positive reviews for absorption of the Noble Energy and has provided
stark contrast to $55 billion acquisition of Andarko petroleum. Along with majority of positive
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factors associated with the risk of $8 billion cannot be ignored. The debt to EBITDA ratio of
Noble energy is lower compared with competitors that requires to restructure the process and use
advanced resources for increasing the earnings. However it has Aa2 Moody's credit rating that
shows it has high quality of fixed income stocks having lower credit risks. Chevron has to
maintain the credit rating and fixed return to investors. The major point of deal was Noble's
position in the Israel is crown jewel with getting new core in international geography for
rebalancing portfolio for gas (Flowers, 2020). However Alistair International and Zalul
Environmental proposing to ban Chevron in Israel could affect the objectives of company and
bear the costs of acquisition without expected returns.
Synergies
After crash of the demand and oil prices in March 2020 there is increasing expectations
from the mergers and acquisitions for showing existing opportunities though having depressed
economical cycle.
Cost Synergies
The attractive transactions are expected to achieve the run rate operating and the other
costs synergies of around $300 million before tax within the closing of year. The Chevron
anticipates transactions as accretive to the ROCE, earning per share and free cash flows a year
the closing for $40 Brent. It means that if price of the oil stays above or at where it had recovered
to, then new acquisitions would be profitable (Zborowski, 2019). Consideration acquisition for
Noble transaction has 100% structured with stock. Company to issue approx 58 million of shares
where shareholders of Noble energy will get Chevron's 0.1191 shares for every share held.
Revenue Synergies
Horizontal Integration: Noble energy has enhanced the unconventional position in DJ
Basin and 92000 highlighted adjacent and contiguous acreage and will offer competitive returns.
International portfolio in Israel will diversify portfolio of CVZ and offer FCF and competitive
returns. Transaction will be adding 18% to the CVX's 2019 reserves at <$5 boe and nearly 7
Bboe of the risked resources of <$1.5/boe. The capital requirements are less as because of
existing establishment. Integrated business and the established Eagle Ford position would further
enhance the CVX's portfolio.
Geographical diversification: The DJ Basin provides unconventional position along with
the competitive returns which could be developed further leveraging the factory model approach.
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Portfolio will diversify large scale production asset in West Africa that strengthens position in
the Equatorial Guinea having future growth opportunities by establishing new plants.
Diversification to Israel will provide strong cash flows and returns with limited capital
requirements. It will effectively manage the giant Leviathan gas fields of Israel and optimise the
export volumes. The diversification has helped the company to be flexible during the crisis. The
Israel extension will provide the natural gas to the Egypt, Israel and the Jordan having strong
projected demands after crisis. Eastern Mediterranean are interesting bet for long term plan. The
fields will be benefiting from rising demand for natural gas worldwide (Oyewunmi, 2017). It is
depressed currently due to economic crisis but demand will grow subsequently after crisis as
natural gas is primary sources of the energy.
Analysis of deal structure with the reference to market and theoretical valuations.
There has been acquisition of the Noble energy for in all stock deal of $5 billion after
approval of shareholders and $10.38 per share. Company for this deal will be issuing 58 million
shares and shareholders of Noble will have 3% in consolidated entity. Largest deal after the
pandemic including $8 billion debt load is valued at approx $13 billion. Strategic move provides
shareholders of acquired company with 0.1191 share of CVX for every share held in Noble. Deal
is entered with motive of expanding presence in Permian and the DJ Basin. Acquisition will
provide annual costs saving of around $300 billion in a year. The highly diversified would
improve topographical diversity of company. It will enhance the capital flexibility and stronger
cash flow generating abilities. Acquired assets will enhance operational potencies and transaction
emphasises commitment to the disciplined deployment of capital.
The overall deal would boost the proven reserves of Chevron by 18% at average prices of
around $5/ barrel. It has been seen that transaction prices represent the premium of around 12%
on average 10 day based over closing stock prices in the July 17, 2020. Factors which could lead
individually to positive rating by execution of recently announced transactions of acquisition of
Noble (Moonan and Razack, 2018). To be upgraded on stand alone basis increasing the scale
and size evidenced by the productions trending above the 500 – 550 mboe/d. It has to maintain
debt/EBITDA below the 1.5x level on sustained basis and to make midcycle debt per flowing
barrel under $12500. bbl. The profitability and FCF will be affected due to ineffective capital
allocation strategies.
Liquidity and Debt structure
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Consolidated cash and equivalents stood approx at $1.4 billion in March 31, 2020. The
additional liquidity is given by unsecured $4 billion credit facility maturing in 2023 March. It is
expected that Noble will repay the $1 billion of revolver balance by the year end of 2020
however available liquidity of company would remain unchanged. From Mauritius profile it has
unsecured notes of $750 million in next 5 years with the $100 million accruing in 2023 and rest
$650 million in 2024.
Discounted Cash Flow
Discounted Cash Flow method refers to the method of analysing assets using
estimates of future unlevered FCG generated by assets and also by taking time value of the
money with respect to future cash flows calculating the present value. Unlevered free cash
flows are calculated for analysis of discounted cash flows that are generated by the
company without considering debt service costs. It involves analysing the cash flows from
asset or investments by calculating the present value of future cash flows of business. The
discounting rate used for measuring present value is opportunity cost of the capital for
investing the money. This rate is required rate of return for the business.
Projected Unlevered Cash Flows
(USD in millions)
2020 2021 2022 2023 2024 Terminal
EBITDA 17455 26494 32624 40611 45338 45338
Deprn & Amort. -12970 15765 -18381 -20679 -22229 -13214
EBIT 4485 42259 14243 19932 23109 32124
Taxes -1794 -4292 -5697 -7973 -9243 -12850
NOPAT 2691 37967 8546 11959 13866 19274
Capital Expenditures -9121 -9701 -11501 -12939 -13909 -13909
NWC Investments -64 32 30 27 18 10
Add: Deprn &
Amort. 12970 15765 18381 20679 22229 13214
Free Cash Flow 6476 44063 15456 19726 22204 18589
Calculation of the Enterprise Value
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Perpetual growth rate 3.50%
Discount Rate 11.09%
Present Value of the 5829.508 35704.60 11273.85 12952.07 13123.70
Total PV of Cash
Flows 78883.73
PV of Terminal
Value 253486.36
Enterprise Value 332370.09
Required Rate of Return (CAPM)
Rf = 3.40%
Return on market = 11.85%
Beta = 0.91
R = Rf+(Rm-Rf)Beta
1.68+(12.11 – 1.68)*0.99
11.09%
The Unlevered cash flows and terminal values in the above cash flows were discounted to
the present value using discounted rate between 10% - 12%. The perpetual growth rats is
assumed at 3.5% for purpose of calculating the terminal value. The present value of cash flows
and terminal value were added to get the enterprise value. It has been evaluated that the
enterprise value 332370 million as per the analysis. The required rate of return shows the cost of
equity which is calculated using sensitivity factor, risk free rate and market return it is also
known as CAPM model. Required rate is 11.09% which shows that investors expect return at
this rate by investing in Chevron.
Price /Sales ttm
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Competitor Analysis
TTM Sales Chevron
Apache
Corporatio
n
Occidental
Petroleum
Conoco
philips
in billion
Market Cap 176.481 6.727 21.483 49.346
Revenue 146.516 6.411 21.232 36.67
PS ratio 1.205 1.049 1.012 1.346
The P/S ratio is investment valuation rayion which shows market capitalisation of
company dividing by sales of company for preceding 12 month. It refers to measure of value
which investors receive from the stocks of company indicating what they would be paying for
stocks per dollar of sales. It could be seen that the PS ratio of Chevron is 1.205 which is adequate
and good. It means that investors are paying 1.205/$ for the company sales.
Chevron has high PS ratio that is showing constant growth every year. In comparison
with the major competitors Conoco philips having PS ratio of 1.346 that is highest among the
competitors. PS ratio of Apache Corporation and Occidental Petroleum is 1.049 & 1.012 which
is lower as compared with Chevron. Company is giant giving tough competition to others.
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Chevron holds the largest market share in this industry and has is also the largest oil
producer. The earnings per share of company is $1.57 and operating profit profit per share of
$0.05. The sales per share are $77.23 which is higher as compared with other competitors
(Blaauw, Maina and Grobler, 2020). PE ratio is 58.76 which is extremely high where the
competitors Exxon Corporation and Oil & Gas producers have PE of 14.19 and 21.73. Current
the share prices are prevailing at $92.01 which is rise from previous years.
Financing
As discussed above company has made issue of 58 million shares for 100% stock
acquisition of the Noble energy. This will provide 0.1191 shareholding per share in Chevron to
Noble Energy. The deal will act as hedge against the fluctuating oil prices after pandemic. The
57% discount has been received for share prices of Noble energy but has also brought increased
risk to company. The value of shares of Chevlon has fallen by 25% after the acquisition. It
maintains strong liquidity position and also the acquisition has provided Chevron Aa2 credit
rating by Moody for the fixed long term investments in company.
CONCLUSION
It could be concluded from the above report that Chevron -Noble Energy deal has
brought the company with higher returns and access over increased acreage. The deal has been
signed for $5 billion shares with $8 billion of debt making it total of $13 billion deal for the
company. The acquisition of Noble has increased the presence over DJ Basin and Permian Basin
in Israel that was main motive behind the acquisition. The Permian basin will provide the
competitive returns to the business and also increased FCF. Demand is depressed due to
pandemic but the demand is going to increase in the near future as shift is moving towards the
more sustainable fuel option. It will operate successfully the Leviathan projects as it is able to
deal with large projects. Noble is leading lower 48 producer having operations in DJ Basin and
has mid stream business in Eagle Ford. The cost synergies are around $300 million per year.
Noble expects high grade exploration portfolio cutting down the workforce, reducing office
buildings, insurance costs and information technology. The deal has also brought the risks to
company with $8 billion and also the proposes issues regarding the stopping the Chevron from
doing business in Israel.
The deal is also beneficial for Noble Energy as it has proposed the deal with 5 other
companies. Acquisition by Chevron will made it a part of bigger company and also the resources
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will be managed by the larger group. Chevlon will be using advanced machineries and also will
be employing advanced machineries in the new plant for deriving the competitive returns.
Therefore, the deal has been beneficial for both the companies.
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McGiven, T.C., 2017. Effective, accountable and inclusive institutions? An analysis of the
Chevron v. Ecuador (II) investment arbitration and the Lago Agrio environmental justice
movement (Doctoral dissertation, University of Waikato).
Shojaeddini, E., and et.al., 2019. Oil and gas company strategies regarding the energy
transition. Progress in Energy. 1(1). p.012001.
Gómez, A. and Avendaño, T.R., Report on Shell and the Extension of the Deepwater Extraction
Frontier.
Flowers, L.P., 2020. E&P Notes (August 2020). Journal of Petroleum Technology. 72(08).
pp.16-19.
Zborowski, M., 2019. Colombia’s New Ambitions Include Caribbean and Shale Development,
But Are They Achievable?. Journal of Petroleum Technology. 71(09). pp.48-53.
Oyewunmi, T., 2017, November. Securing Regulatory Stability for International Gas
Commercialisation and LNG Projects: the Nigerian Experience. In Riding the Energy
Cycles, 35th USAEE/IAEE North American Conference, Nov 12-15, 2017. International
Association for Energy Economics.
Moonan, X. and Razack, J., 2018, October. From Deep Horizon to Deep Water, a North Eastern
Latin America Success Story, for Some... In AAPG Geoscience Technology Workshop.
Blaauw, S.A., Maina, J.W. and Grobler, L.J., 2020. Life cycle inventory of bitumen in South
Africa. Transportation Engineering. 2. p.100019.
Online
Krauss, C., 2020. Chevron Deal for Oil and Gas Fields May Set Off New Wave of Mergers.
[Online]. Available Through:<https://www.nytimes.com/2020/07/20/business/energy-
environment/chevron-noble-oil-mergers.html>.
Chevron Announces Agreement to Acquire Noble Energy. 2020. [Online]. Available
Through:<https://www.chevron.com/stories/chevron-announces-agreement-to-acquire-
noble-energy>.
Blackmon, D., 2020. Chevron’s Deal To Buy Noble Energy Opens To Rave Reviews. [Online].
Available Through:<https://www.fitchratings.com/research/corporate-finance/fitch-
places-noble-energy-inc-on-watch-positive-20-07-2020>.
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