Oil and gas giant Chevron is set to acquire hydrocarbon exploration firm Noble Energy in an all-stock deal valued at $5 billion. Chevron announced on Monday that it had reached an acquisition agreement with Noble Energy, a surprising move given the state of the global oil industry and the headwinds facing it due to the continued spread of the coronavirus pandemic.
The acquisition is considered to be the largest deal of its kind since the start of the pandemic. The health crisis has managed to ravage the entire industry, bringing oil prices to all-time lows amid the massive drop in demand as global transportation grinds to a halt.
Under the all-stock acquisition deal, Noble Energy shareholders will receive Chevron stocks. Chevron has also reportedly agreed to take on Noble Energy's debts, which stand at around $8 billion. Including the debt, the transaction will technically have a value of around $13 billion.
Once the two companies are merged, the combined entity is expected to generate annual cost savings of up to $300 million due to operational synergies. The transaction is expected to be completed by the fourth quarter of this year. The transaction comes after Chevron had lost the bid to acquire Anadarko in May. The company was outbid by Occidental Petroleum.
The United States' share oil and gas sector was particularly heavily hit by the spread of the pandemic. The late response to the decline in demand by global oil producers, which led to oil prices hitting the negative mark, severely hampered U.S. shale companies from continuing their operations. Some companies had also incurred massive debts to keep their businesses afloat, further exacerbating their already dire circumstances.
According to a study conducted by Deloitte, around 30 percent of all shale oil and gas firms will likely become insolvent if oil prices remain at $35 per barrel. As of Monday, U.S. oil futures had remained around $40 per barrel. Industry experts had pointed out that companies with deeper pockets can take advantage of the situation as they will be able to buy out cheap assets from other firms that are struggling to survive.
M&A analysts at Enverus have stated that buying Noble Energy makes a lot of sense for Chevron given how their businesses complement each other. Even with Noble Energy's substantial debts, the transaction is relatively cheap given the company's proven but underdeveloped reserves. They also pointed out that consolidations such as this will likely continue in the coming months as the industry is unlikely to quickly recover in the near term.
