Could Chevron’s takeover of Noble spark more oil and gas deals?
Low oil and gas prices have impacted heavily on the petroleum industry with many companies writing off the value of assets while a number have declared bankruptcy.
Notable examples of the former are Shell, which said in June that it was writing down up to $US22bn ($31.3bn) of assets in the second quarter of 2020, and fellow supermajor BP taking red ink through $US17.5bn worth of oil and gas assets.
Australian majors have also not been spared, with Oil Search (ASX:OSH) wiping up to $570m off the value of its assets while liquefied natural gas exporter Woodside Petroleum (ASX:WPL) will take a $6.6bn hit.
Meanwhile, some companies that have fallen on the sword include shale oil and gas pioneer Chesapeake Energy and Whiting Petroleum.
Now Chevron has sparked off what some believe is a wave of merger and acquisition activity in the beleaguered sector with its plan to acquire Noble Energy through a $US13bn all-stock transaction.
The US supermajor notes that the acquisition of Noble will add low-capital, cash-generating offshore assets in Israel to its portfolio while increasing its footprint in the US unconventional position, with de-risked acreage in the DJ Basin and 92,000 largely contiguous and adjacent acres in the Permian Basin.
“This is a cost-effective opportunity for Chevron to acquire additional proved reserves and resources,” chairman and CEO Michael Wirth said.
“Noble Energy’s multi-asset, high-quality portfolio will enhance geographic diversity, increase capital flexibility, and improve our ability to generate strong cash flow.”
Market watcher and commentator Wood Mackenzie pointed out that Chevron’s move was the first large-scale corporate acquisition during the current downturn.
“Chevron was our top pick to lead bottom-of-the-cycle corporate consolidation arising from the oil price collapse and the COVID-19 pandemic,” Woodmac senior vice president corporate analysis Tom Ellacott said.
Woodmac said the acquisition of Noble’s position in Israel provided Chevron with a new core international geography that would rebalance its portfolio towards gas and provide a “springboard to capture further upside potential in the region”.
Deloitte vice chairman and US oil, gas and chemicals leader Duane Dickson told the New York Times that in a downturn, “the strong get stronger and the weaker players try to survive as best they can, and some will be bought”.
“There will be some bankruptcies and mergers and acquisitions like you saw today and I would expect that will continue and potentially pick up speed.”
Latigo Petroleum president Kirk Edwards says as has been seen in previous oil price shocks, stronger public companies with bigger balance sheets have been able to make major acquisitions and this just follows the same trends.
Cowen analysts said last week that with investors rewarding companies that preserve their cash, the next round of consolidations would likely have to wait.
They noted that acquisitions completed since the last downturn in 2014-16 had mostly turned out badly and likely made oil and gas executives cautious about committing to big moves.
Stockhead’s resident resources expert Peter Strachan said that while there would be marriages of convenience such as the merger between Real Energy (ASX:RLE) and StrataX (ASX:SXA) locally, there wouldn’t be a full-on M&A binge.
“The strong will be picking over the entrails of the weak and dying,” he added.
Other analysts warned that corporate debt levels could dampen the enthusiasm for more acquisitions.
PGIM Fixed Income principal told the New York Times that while there were some attractive buys, no one wanted the debt that was going to go along with any deal.
“I wouldn’t expect a wave of M&A until the industry can clean up the leverage it already has, and that is going to take a fair amount of time.”