The current year has been shaping up as the worst in decades for oil and gas mergers as the deep uncertainty surrounding the sector killed Big Oil’s appetite for acquisitions. Since the epic oil price crash, Wall Street has opined that the majority of Big Oil executives will be too gun-shy to pull the trigger on the numerous debt-ridden companies and hordes of others facing bankruptcy.
But perhaps Wall Street underestimated the allure of a huge pool of assets ready for the taking for cents on the dollar.
After a big lull during the first half of the year, the oil and gas M&A space has suddenly come to life after Chevron Corp. (NYSE:CVX) and residential solar company Sunrun Inc. (NASDAQ:RUN) announced big takeovers that befit their status.
On June 20, Chevron announced that it had agreed to purchase Noble Energy (NASDAQ:NBL) in an all-stock deal valued at $5B.
Meanwhile, Sunrun has announced that it will acquire rival Vivint Solar (NYSE:VSLR), in another all-stock deal valued at $3.2B including debt.
And now there’s a growing feeling that the two mergers could open the floodgates for similar deals especially in the shale sector.
Chevron Buys Noble Energy
Chevron has agreed to buy Noble Energy for $10.38/share, a mere 7.6% premium over Noble's Friday closing price of $9.65. In effect, Noble shareholders will get 0.1191 shares of CVX for each share of NBL held.
Although the deal appears cheap for Chevron shareholders at face value, the deal value actually swells to ~$13B when you include Noble Energy’s hefty debt load. Nevertheless, Noble was down more than 60% in the year-to-date before the deal was announced so Chevron still managed to avoid overpaying for the company.
In fact, the deal has mostly been well received by Wall Street and shareholders alike with CVX shares having gained 6% since the deal was announced. That’s rather unusual since shares of the acquiring company more often than not tend to fall after a deal. There are a couple of plausible reasons why Chevron’s purchase ie being viewed positively.
First off, buying Noble will enhance Chevron's presence in the pivotal Permian Basin by adding 92K of Noble’s largely contiguous and adjacent acres. It will also enhance its position in the Colorado's DJ Basin as well as add assets in West Africa and the eastern Mediterranean.
Second, the cost synergies involved in the deal are quite significant. CVX has announced that the combined entity will generate $300M in cost synergies per year before tax and will also be accretive to earnings, free cash flow and book returns just a year after the deal is consummated.
Third, and perhaps most significant, is that Chevron is not taking on any debt to finance the deal. Chevron famously dodged a big bullet after walking away from a bidding war for Anadarko Petroleum last year. Occidental Petroleum took on massive debt to finance the $55B deal and has since struggled under a swelling mountain of debt.
Wall Street has been sharing the CVX/NBL enthusiasm.
Wood Mackenzie's Jean-Baptiste Bouzard has hailed Chevron’s purchase as an ‘‘Israeli Gas Play’’ that provides 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."
Bouzard observes that getting bigger isn't necessarily the end-game of this merger but, rather, getting better. He notes that Noble offers a unique combination of shale as well long-cycle assets much as Anadarko would have--but, of course, at a much cheaper price.
Sunrun Buys Vivint Solar
Sunrun Inc., one the largest U.S. residential solar companies, will acquire leading residential solar competitor, Vivint Solar in yet another all-stock deal. Vivint shareholders will get 0.55 shares of Sunrun for every share held, good for a 10.4% premium to Vivint's close on Monday.
The merger will create a behemoth with about 500K customers, beating Tesla Inc.’s (NASDAQ:TSLA) residential solar business in scale and easily making it one of the world's largest providers of solar equipment. According to UBS Research, last year, Tesla was the leader of the residential solar space, accounting for 14% of all U.S. residential solar installations thanks to its 2016 acquisition of SolarCity. The Sunrun-Vivint Solar combo will, however, now top that with a 16% slice of the market.
Unlike the Chevron-Noble Energy merger, the immediate cost synergies in the Sunrun tie-up are rather underwhelming at just $90M per year. However, there’s more to the deal than meets the eye:Jinjoo Lee of the WSJ says the larger scale of the new entity might eventually help tackle Sunrun’s "soft costs" such as customer acquisition costs, labor and permits.
Looks like a valid point. Although solar hardware costs have come down by nearly 80% over the past decade, overheads for solar companies have remained high with soft costs accounting for 64% of residential overall costs in Q1 2020 up from 52% in 2014.
The merger has also been well received by shareholders, with Sunrun shares tucking on another 10.5% since it was announced to take their year-to-date gain to an impressive 195%.
Wall Street appears impressed, too:KeyBanc has upgraded Sunrun to Overweight from Neutral.
Other Potential Deals
According to Tudor Pickering, Chevron’s purchase of Noble could open the door for similar ‘logical deals’ thanks to debt maturities getting ever-closer and companies scrambling to survive. Pickering sees a tie-up between Devon Energy (NYSE:DVN) and Cimarex Energy (NYSE:XEC) as another potential deal.
RBC's Scott Hanold sees some of Permian Basin's big independent drillers including Pioneer Natural Resources (NYSE:PXD), Diamond Energy (NASDAQ:FANG), Parsley Energy (NYSE:PE) and Callon Petroleum (NYSE:CPE) being sold.
And they are mostly expected to follow the all-stock, no-debt, modest premiums playbook that we have just seen with Chevron and Sunrun.
As Enervus M&A analyst Andrew Dittmar has told Reuters, "Sometimes you need the one significant deal to reset the comps and manage price expectations. The debt maturity wall that has been out there for some time is getting closer and closer."
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