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What’s the strategic and economic rationale behind Chevron’s US$13-billion acquisition of Noble?

We analyse the first large-scale corporate deal since the oil price crash

1 minute read

Chevron’s bid for Noble Energy does not come as a surprise. The Supermajor demonstrated its willingness to pursue large-scale M&A in its ultimately unsuccessful bid for Anadarko last year. While Noble won't add the same scale, the rationale is equally compelling.

Find out why we think the biggest deal of the year so far makes strategic sense. Watch the video, powered by Wood Mackenzie Lens, as our analysts take a deep dive into the numbers. Or read on for the highlights.

Sound strategic and economic rationale

The deal won’t be transformative for Chevron – but in this environment, that’s no bad thing. We previously dubbed Noble a ‘mini-Anardarko’. There are clear similarities: more exposure to Delaware tight oil, an entry into the cash-generative DJ Niobrara play and diversification into international gas.

But acquiring Noble will go further than Anadarko would have towards reducing portfolio concentration in Chevron’s anchor positions. Most importantly, the deal economics are attractive, and the transaction brings greater diversification benefits.

Israel is the jewel in Noble’s crown

Much of Noble’s value comes from its position in East Mediterranean gas: a region that has drawn the attention of other Majors. Key assets include Leviathan in Israel, one of the largest gas fields in the East Med, Tamar and Aphrodite, a recent discovery offshore Cyprus with 3.5 tcf of recoverable gas.

Israel will add long-life gas revenues that will help to rebalance Chevron’s ‘oily’ production mix. It will rank as the Supermajor’s sixth most important region by value, and the country will become a springboard to chase further regional upside.

Overall, Noble’s East Med contingent resources could deliver US$1.4 billion of upside to our base case valuation of the deal.

New US unconventional play

Noble’s maturing portfolio in the DJ basin will add a new play to Chevron’s US unconventional portfolio that could be run for cash flow generation.

The company also provides complementary Permian acreage that will help to consolidate Chevron’s strong position in the Delaware basin.

Chevron may not be done deal hunting if valuations stay low. We simply don't see many other buyers with the appetite or financial muscle to pursue large-scale upstream M&A.

But the deal isn’t without risk

Chevron will need to navigate geopolitical risk in the East Med. The long-running Turkey-Cyprus dispute could slow down Aphrodite’s development.

And with ramp-up at Leviathan already impacted by weak gas demand following the coronavirus outbreak and increasing competition to supply local gas markets, monetising the contingent resource will not be without its challenges.