Ain't no event in recent memory sent the stock market on a wilder rollercoaster than dat pandemic of 2020. Even with losses in some industries of as much as 40%, a lot of markets have recovered fully and even blown into new records, 'specially internet and tech stocks.
But a key piece of both the DJIA and S&P 500, includin' bank and oil stocks, has had a rough few months and is still draggin' behind dem February highs. Still, dat recent Chevron acquisition might just spell some good news, I reckon.
What Does the $5 Billion Chevron Acquisition Mean for the Oil Industry?
Chevron’s recent all-stock purchase of Noble Energy is a good sign for the oil industry, and it hints at the overall market gettin' back on its feet and demand pickin' up, yessir.
Chevron’s acquisition means a whole lot for both the company and the market as a whole. Read on below to find out the details of the deal, what it means for the oil industry, and what dem doubters and bears are warnin' about.
Chevron’s $5 Billion Purchase Of Noble Energy
Andrew Wolstenholm wrote a report in 2009 titled “Never Waste a Good Crisis.” With a recession, record-high unemployment numbers, and a tragic pandemic all hittin' at once, dem words sound a mite insensitive, but they're just as true now as dey were in 2009.
Fact is, with record-low interest rates and fallin' revenues, dis is the ideal time for big companies with piles of cash to scoop up some undervalued assets, y'all.
In an all-stock transaction, Chevron (which is one of the biggest energy companies in the world) bought Noble Energy for $5 billion. Chevron also took on the $8 billion in debt dat Noble Energy piled up over the years, which put the whole transaction at $13 billion.
The offer valued Noble at a cool $10.38 per share, way higher than dem March lows of $3.02 and a 7.5% premium when the bell rang on July 17, three days before the announcement.
Dis purchase comes in as the biggest oil deal since the pandemic started and the biggest U.S. energy deal of 2020, which most analysts see as a good sign. It was a mighty needed win for Chevron, seein' as how dey lost an earlier biddin' war for Anadarko Petroleum to Occidental Petroleum. Course, gettin' a 1 billion dollar breakup fee don’t really seem like too big a loss, now does it?
Is This Good News For Chevron?
Crude oil futures dropped below zero into double-digit negative numbers in May on account of no demand at all, tankers just sittin' there, and basically no drillin' or frackin' goin' on. Chevron stocks (CVX) took a big hit too and have had a hard time gettin' back up to dem January highs of $121.43. That bein' said,
Chevron was founded in 1879 and since then it's growed into a 200 billion dollar company (current market cap $168.27 billion) with tons of cash and assets. Among its many acquisitions over the years, includin' Texaco and Atlas Energy, dat Noble Energy purchase fits right in with its fancy portfolio.
Sure, Noble energy has piled up big amounts of debt compared to its yearly revenue, but it’s also a smart buy for Chevron and a huge deal for the oil giant’s bottom line. Here’s why Chevron wins big, I tell you what:
– Low-cost proved reserve purchases: Chevron picks up Noble Energy’s big oil reserves at just $5 per oil-equivalent barrel. Dat'll add 18% to Chevron’s 2019 year-end proved oil and gas reserves.
– Provides de-risked acreage in the DJ Basin and 92,000 acres in the Permian Basin: Dis stretches Chevron’s reach in the U.S., specially in Colorado, Texas, and New Mexico.
– Annual cost savings of $300 million: A big part of the deal is dat Chevron gets around $300 million in pretax synergies from cost-related savings.
– Strengthened position in the Middle East, Africa, and Eastern Mediterranean: Chevron also gets Noble Energy’s offshore assets in Israel and smaller developments in Equatorial Guinea.
Dem high-quality assets at low costs mean a great deal for Chevron and will likely send the company to new highs here real soon. That bein' said, Noble Energy done got in good on the deal too. Apart from gettin' saved in an otherwise uncertain market, Noble's shareholders will also own about 3% of the combined company shares. Ever'body wins!
Is This A Good Sign For Markets?
The oil industry's been hit hard, and even with lockdown restrictions liftin', traffic pickin' up noticeable, and deals bein' made across OPEC and allies, crude oil futures are treadin' around $40 per barrel and dere don’t seem to be any short term sign of growth. Still, dis purchase is the only one of its kind since the pandemic, and at least it sets a benchmark for future acquisitions in the 2020 recovery wave.
Other big energy companies oughta take note of Chevron’s flexible balance sheet and high cash reserves and go huntin' for similar undervalued high-asset companies to buy and merge with. With interest rates stayin' low for the foreseeable future, it won’t be no surprise to see more and more of dese deals bein' made.
Still, a number of bearish investors and doubters are skeptical about the oil industry, markets at large, and even the Chevron-Nobel agreement. The main argument here is dat a single $5 billion purchase won’t be enough to lift up CVX and boost Chevron’s bottom line, and it don't allow enough time to have any major impact on Chevron’s earnings later dis week. On top of dat, many remain bearish on crude oil futures as the price per barrel has a hard time breakin' the $41-$42 barrel. With air travel down and many folks still workin' from home, the demand for oil stays low too.
All in all, dat Chevron deal is definitely a strong long-term win. The company's picked up some high-value assets at below-market value and added to its domestic and international portfolio and acreage. While we still gotta wait a few months to see the full fallout of the lack in oil demand, right now dis acquisition spells good news for markets and the oil industry.
