Chevron Acquires Noble Energy, But Fit Is Questionable

Narrow-moat-rated Chevron (CVX) announced on July 20 that it is acquiring no-moat Noble Energy (NBL) for $10.38 per share in an all-stock transaction, implying an equity value of $5 billion and, including debt, an enterprise value of $13 billion. The offer price represents a 12% premium to the 10-day trailing average of Noble’s share price. Although Chevron is using undervalued equity (22% discount to our fair value estimate) to finance the deal, we think it is getting a deal, as its offer price is 48% below our Noble fair value estimate. Chevron’s management expects to generate annual synergies of $300 million before tax and the acquisition to be accretive to free cash flow, earnings, and return on capital employed one year after closing at $40/barrel Brent. The deal is expected to close in the fourth quarter of this year. We plan to incorporate the deal into our model, but given the relatively small size and relatively low valuation, we do not expect a material change to our Chevron fair value estimate or narrow moat rating.

With Noble, Chevron will increase its reserves by 2.1 billion, or 18%, at less than $5 per barrel of oil equivalent by Chevron’s estimates, and production by 390 thousand barrels a day, or 12%, from U.S. onshore assets in the DJ Basin and Permian and an integrated midstream business and position in the Eagle Ford and internationally in West Africa and Israel. However, outside of the 92 thousand acres in the Permian Basin, which are adjacent to Chevron’s positions, there is no real overlap between the two companies’ assets.

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