September 20, 2020

Chevron Deal for Oil and Gas Fields May Set Off New Wave of Mergers

HOUSTON — In the first big deal since oil prices crashed four months ago, Chevron agreed on Monday to buy Noble Energy for roughly $5 billion in what many experts consider the beginning of a sweeping consolidation in the U.S. oil industry.

The coronavirus pandemic has caused a sharp decline in oil demand, putting intense pressure on oil companies with large debts. This includes Noble, which is based in Houston and has operations in Colorado, Texas, the eastern Mediterranean and West Africa.

But it has also created an opportunity for oil giants to gobble up smaller fish and extend their acreage in places like the Permian Basin, which straddles Texas and New Mexico. Chevron, for one, already has a large presence in the basin and easy access to large pipeline networks, which should help the company put Noble’s assets to good use.

“In a downturn like this, the strong get stronger and the weaker players try to survive as best they can, and some will be bought,” said Duane Dickson, Deloitte’s vice chairman and U.S. oil, gas and chemicals leader. “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.”

Like all oil companies, Noble has struggled to make a profit with oil prices at around $40 a barrel. The price has recovered somewhat in recent months, but the pandemic’s persistence and the recent surge of infections and hospitalizations in Texas and other states have led some executives to conclude that the price of oil may not climb much more anytime soon.

Even before the pandemic, the shale drilling boom helped produce so much oil that a growing number of wells were unprofitable. More than 20 North American producers have filed for bankruptcy this year, including Chesapeake Energy. The oil service giant Halliburton on Monday reported a $1.7 billion loss for the second quarter and said it had written down its assets by $2.1 billion.

Even big companies like Chevron have been forced to lay off workers. Oil companies have also slashed dividends and curtailed stock buybacks to preserve cash.

Though relatively small, the Chevron-Noble deal could signal a measure of confidence on the part of industry executives who are willing to buy up smaller companies in anticipation of a recovery in the not-too-distant future.

ImageA Noble Energy facility in Israel.
Credit…Tamir Kalifa for The New York Times

“Our strong balance sheet and financial discipline gives us the flexibility to be a buyer of quality assets during these challenging times,” said Michael Wirth, Chevron’s chief executive. “This is a cost-effective opportunity for Chevron to acquire additional proved reserves and resources.”

This is the first major acquisition by Chevron since the company was outbid by Occidental Petroleum for Anadarko Petroleum last year. That $38 billion deal has left Occidental heavily in debt, while Chevron walked away with a $1 billion termination fee.

Chevron and Noble placed the value of their deal at $13 billion, including debt. It is subject to the approval of Noble shareholders, who will own roughly 3 percent of the combined company. There is also a chance that another oil company could bid for Noble.

If the deal goes through, Chevron would pick up 92,000 acres of shale oil near or adjacent to its own fields. While that is far less than it would have picked up from Anadarko, Chevron is getting these fields at a far better price per acre. It will also acquire assets in the Eagle Ford field of South Texas, the DJ Basin in Colorado, and Equatorial Guinea.

The deal will also give Chevron a presence in Israeli waters where Noble has discovered large natural gas deposits in recent years. But those assets will most likely not generate huge profits for Chevron for a few years because there is a glut of gas in nearby Europe.

Nevertheless, the acquisition ought to help Chevron — which has put much of its emphasis on oil exploration — get more deeply into natural gas.

“Israel will provide Chevron with a new core international geography that will rebalance the portfolio towards gas and provide a springboard to capture further upside potential in the region,” said Jean-Baptiste Bouzard, an analyst at Wood Mackenzie, an energy consultancy.

Industry executives said Chevron’s move followed a historical pattern in which bigger, financially stable companies acquire smaller, less stable outfits during downturns.

“You should see even more of these types of acquisitions happening as the crude price stays in this lower range,” said Kirk Edwards, president of Latigo Petroleum of Odessa, Texas. “As we have seen in the past during oil price shocks, stronger public companies with bigger balance sheets have been able to make major acquisitions and this simply follows that same trend.”

But some analysts cautioned that the heavy corporate debt levels could stand in the way of sweeping acquisitions.

“While the equity prices may be attractive, no one wants the debt that is going to go along with any deal,” said David Winans, a principal and analyst at PGIM Fixed Income. “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.”

Chevron shares closed down more than 2 percent. Noble shares ended the day up more than 5 percent, after a decline of roughly 50 percent over the last six months.