It took a while, but Chevron (NYSE:CVX) has finally found a deal to its liking. This week, the oil giant agreed to acquire Noble Energy (NASDAQ:NBL) for $5 billion in stock. Add in the assumed debt, and the total transaction value is around $13 billion.
That's a much lower price tag than Chevron's last acquisition attempt, when it had an agreement to acquire Anadarko Petroleum for $33 billion in stock and cash. Tack on the assumed debt and the total transaction value would have been $50 billion. In the end, Occidental Petroleum (NYSE:OXY) outbid it by $5 billion in a move that backfired big time.
Instead of using its financial might to push the bidding higher, Chevron walked away from that transaction and waited until it found another target that met its criteria. That patience has paid off, as its pending purchase of Noble Energy looks like an even better deal on paper.
Comparing the deals
Chevron's offer for Anadarko was at a whopping 38.9% premium to the company's closing market value before the deal announcement. It felt that price was worth paying, since Anadarko checked all the boxes. These included:
- Strong strategic fit: Anadarko would have bolstered Chevron's leading position in the Permian Basin, enhanced its deepwater Gulf of Mexico operations, and added another world-class LNG resource via its interests in Mozambique. On top of that, it would have added new positions in West Africa and the U.S. as well as a sizable stake in master limited partnership Western Midstream (NYSE:WES).
- Significant operating and capital synergies: Chevron estimated that it could have achieved $1 billion in cost savings and $1 billion of capital spending reductions within a year of closing the deal.
- Being accretive: Chevron estimated that the transaction would have been accretive to its free cash flow and earnings per share within one year of closing, assuming $60 Brent oil.
Despite those benefits, Chevron chose not to increase its bid for Anadarko after Occidental pushed the price past its comfort level. CEO Michael Wirth commented on this decision by stating: "Winning in any environment doesn't mean winning at any cost. Cost and capital discipline always matter, and we will not dilute our returns or erode value for our shareholders for the sake of doing a deal."
That discipline and patience are now paying off as the oil company has found an even better acquisition opportunity in Noble Energy. It's paying a much smaller 12% premium for the oil and gas company, which still checks all the boxes:
- Strong strategic fit: Once again, Chevron found a deal that enhances its operations in the Permian Basin. It also strengthens its position in the Eastern Mediterranean and West Africa via Noble's offshore operations in Israel and Equatorial Guinea. Meanwhile, it adds new areas in the U.S. and brings a stake in MLP Noble Midstream (NYSE:NBLX).
- Attractive synergies: Chevron estimates that the combined company can deliver $300 million of pre-tax operating and other cost synergies within one year of closing.
- Being accretive: Chevron anticipates the transaction will be accretive to its return on capital employed (ROCE), free cash flow, and earnings per share within one year of closing, assuming $40 Brent oil.
Drilling down into the numbers
While Chevron's acquisition of Noble Energy isn't as splashy as a deal for Anadarko would have been, it's a far superior transaction on a value basis. For example, one of the main characteristics Chevron looks for in an acquisition target is synergies. It expected Anadarko to deliver an impressive $1 billion in annual cost savings. While Noble will only provide $300 million in cost savings, that's an impressive number when putting it into the perspective of the size of these transactions as Anadarko would have cost $50 billion, while Noble checks in at about $13 billion. To put that into context, the synergy yield on the Anadarko deal would have been 2%, while Noble is a bit higher at 2.3%.
Meanwhile, Chevron would have acquired more than 10 billion barrels of oil and gas resources if it purchased Anadarko at an implied price of less than $3 per barrel of oil equivalent (BOE). It will acquire about 7 billion BOE of resources in the Noble Energy deal at an implied price of less than $1.50 per BOE.
Finally, while both transactions would have been accretive to free cash flow and earnings per share, Anadarko required an average Brent price of $60 to deliver that accretion. On the other hand, the Noble Energy deal only needs an average Brent price of $40 to be accretive. That's due to the low price it's paying for Noble Energy's resources following this year's market downturn.
Rewarded for waiting
Chevron chose not to engage in a bidding war with Occidental because it knows that winning at all costs can be costly. Instead, it decided to remain disciplined and wait for another opportunity, which it found in Noble Energy. While that deal won't quite move the needle like Anadarko would have, it's a much better transaction on a value basis, made possible by this year's downturn in the oil market.