How Big Oil’s M&A targets have changed
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No one has experienced an M&A market as bad as this. The collapse in oil and gas prices and Covid-19 killed deal activity, with 2020 so far recording the smallest number of deals in any month, any quarter and any half-year. There was no transaction in H1 over US$1 billion, the first time this has happened in a six-month period since our records began early this century. The monthly average spend on deals has been just 5% of the run rate of the last 15 years.
Chevron’s US$13 billion bid for Noble Energy is a welcome sign that things may be starting to get back to normal. The deal, though, is hardly a shock. Big Oil going after financially stretched independents is what happens in a downturn, and Chevron was always a likely early mover. Tom Ellacott, Corporate Analysis, Scott Walker, M&A, and Amy Bowe, Head of Carbon, identify three aspects of the transaction which say much about how the Majors’ strategies have changed as they build a portfolio for the future.
First, the declining appetite for risk. Buyers in prior downturns would use M&A to load up on assets, seeking to create value by riding the next, inevitable upcycle. Big Oil’s aspirations for scale, growth and capital intensity have been tempered over the last few years by a much more sober outlook for longer-term commodity prices, related to the energy transition and the threat of peak oil demand.
Noble Energy is a mid-sized independent and not much more than a tuck-in deal, with a value about 10% of Chevron’s own upstream portfolio NPV10. Compare that with Shell’s bid for BG in April 2015 (33% of Shell’s upstream NPV), the first big deal in the last downturn; or even Chevron’s own aborted bid for Anadarko in April 2019 (25%).
The type of assets Majors want has also changed. Corporate acquisitions used to be as much about future development potential – big pre-FID project hoppers, undrilled US Lower 48 inventory, even exploration upside. Noble has little or no capital-intensive pre-FID projects in the near term – the next phases of the giant Leviathan gas development in Israel will be self-funding from project cash flows. It’s a very different proposition to Anadarko’s giant Mozambique greenfield LNG project.
Second, the Majors’ divergent strategies on decarbonisation. The European Majors have crossed the Rubicon, diversifying into zero-carbon assets in pursuit of net-carbon neutral ambitions. By implication they will progressively reduce exposure to oil and gas. There’s zero sign of US Majors going in that direction; Chevron’s acquisition seems to confirm a strategy that’s still very much focused on oil and gas.
Third, value drives new investment, but resilience and sustainability are now central to strategy. Being focused on oil and gas doesn’t mean ‘same old, same old’. To continue to attract capital, portfolios have to be built around core advantaged assets – low-cost, long-life, low carbon-intensive barrels.
Noble’s portfolio make-up of US Lower 48 exposure and East Mediterranean gas is similar to Chevron’s core positions. The trick will be to ensure that through managing costs and spend, Chevron maintains its peer-leading cash margins that are central to its portfolio resilience.
Buying lower carbon-intensive E&P assets is another way to reduce carbon intensity and improve ESG metrics. Our Carbon Emissions Tool ranks Chevron’s upstream carbon intensity as the highest of the Majors, mainly due to its legacy heavy oil production in California and Venezuela, plus its Australian LNG. In contrast, Noble’s production has around half Chevron’s carbon intensity. Combining the portfolios will cut Chevron’s intensity by around 10%; pro-active portfolio management will be needed to get it down further.
Is this the start of sector consolidation? Almost certainly – the industry still has too many players, in the US Lower 48 in particular. But it’s not going to happen fast. Few aspiring predators have access to capital to take advantage of a buyers’ market. And the Majors’ pursuit of resilience and sustainability suggests they are more likely to be sellers of assets than buyers.
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