Chevron (CVX -0.29%) recently agreed to acquire Noble Energy (NBL) for $13 billion, which includes the assumption of debt. While the main draw was Noble's oil and gas assets -- especially its positions in the Permian Basin and offshore Israel -- Chevron would pick up several other intriguing assets, including Noble's stake in master limited partnership Noble Midstream Partners (NBLX).
That makes the deal a noteworthy one for Noble Midstream, since it will soon have a much more financially secure parent running the show. That could put the company's 9%-yielding dividend on a much more sustainable foundation.
Joined at the hip
Noble Energy currently owns a 63% stake in Noble Midstream following a strategic transaction late last year to eliminate management fees and acquire its remaining midstream assets. In addition to holding a sizable stake in the company, Noble Energy is also one of Noble Midstream's top customers. The company currently supplies 81% of its earnings, with the bulk of that coming from its gathering and processing business.
That close relationship has some strategic benefits. The biggest is that Noble Midstream had the right to build the infrastructure needed to support its parent's growth. Thus, as Noble Energy increased its volumes, Noble Midstream's cash flows would follow suit.
However, there was one key downside: Noble Midstream's business would suffer if Noble had to hit the brakes. That's what happened this year as Noble cut its capital budget when oil prices declined to preserve cash, forcing its MLP to make similar moves, including reducing its distribution.
Weighing the pluses and minuses of a new parent
Noble Energy took decisive action when oil prices cratered earlier this year to protect its balance sheet, including cutting its capital budget by 50%. Because of that deep spending cut, the company deferred much of its well completion activities in the DJ and Delaware Basins, where Noble Midstream operates, impacting the volumes flowing through its gathering and processing assets.
Chevron also responded to this year's oil market downturn by slashing spending. Overall, it reduced its capital budget by about 20%, with the largest cut coming at its Permian Basin operations. It expects its production in that region to be about 20% below its initial guidance. As a result, its midstream providers will gather and process fewer volumes, which will impact their cash flow.
Because both companies cut deeply into their U.S. drilling budgets, this year likely would have been tough for Noble Midstream even if Chevron were in control. Though Chevron's financial strength does give it much more flexibility to quickly boost spending when the oil market recovers. Thus, Noble Midstream could benefit from having Chevron in charge in the future.
However, that assumes Chevron wants to pour capital into the DJ Basin, which would be a new area for the company. One of Chevron's primary reasons for buying Noble was to pick up its acreage in the Permian Basin, which is adjacent to its land in the region. It had previously tried to buy Anadarko Petroleum for that very same region.
That desire to bulk up in the Permian is worth noting because Noble Midstream currently gets most of its earnings (76% in 2020) from the DJ Basin. If Chevron doesn't put as high a priority on that region, it could stunt Noble Midstream's growth. Though, on a positive note, it now has 15 customers on its systems in that region after recently starting to gather for a new customer this year.
Another question that remains is what Chevron might do with its interest in Noble Midstream. It has several options, including:
- Maintain its stake and allow Noble Midstream to continue pursuing more third-party volumes.
- Use Noble Midstream to support its growth by providing it with organic expansion and acquisition opportunities, including dropping down the midstream assets of Chevron Pipe Line Company.
- Exit its stake with an outright sale or spin-off to shareholders.
With such a range of options, there's a lot of uncertainty about the future of this MLP.
The future of this dividend isn't evident at the moment
Units of Noble Midstream popped on the day Chevron announced a deal to buy its parent in hopes that it will benefit from having a financially stronger sponsor. While that might be the case, there are many unknowns at the moment, including whether Chevron will invest in the DJ Basin or even keep its stake in the MLP. It's too risky for income investors right now, since it's not clear what the future holds for this 9%-yielding MLP.