The merger of Noble Energy stock has been a strong fit for Chevron, and we do not expect any additional suitors for NBL to emerge. Noble has a diversified asset base, with onshore and offshore operations both overseas and in the U.S., and has created value for shareholders by developing its core acreage position in the DJ. It also generates strong free cash flow with help from the recently approved Leviathan gas project.
Based on Chevron’s July 17 closing price, Noble shareholders will receive 0.1191 shares of Chevron for each NBL share. Chevron will issue approximately 58 million shares of stock. The boards have approved the transaction of both companies and the fourth quarter of 2020. The transaction premium is about 8% based on the closing stock prices on July 17 and nearly 12% based on the 10-day average of closing stock prices as of this date. Following the closing, Noble shareholders will own approximately 3% of the combined company.
Chevron investors should benefit from a solid strategic fit. In addition, CVX expects $300 million of synergy benefits and looks for earnings one year after the closing. For their part, Noble shareholders will receive a modest acquisition premium if they choose to sell, or receive stock in a larger, well-capitalized company if they maintain their existing positions in NBL. In addition, they will no longer bear the full costs of Noble’s substantial debt. May 8, Noble reported an adjusted 1Q20 net $85 .18 operating loss of $44 million or $0.09 per share in 1Q19. EPS topped our loss estimate of $0.05 .03 per share. The swing to an operating profit reflected better-than-expected production, lower well costs (down 10%-15%), and significantly lower capital spending, which was down 20% from management’s original expectation. Volume rose 16% to 390,000 barrels of oil equivalent per day (boe/d), reflecting increased production in the Delaware and DJ Basin. The U.S. generated 69% of 1Q20 volume; Israel accounted for 17%, and West Africa for 14%. In 1Q20, Noble operated an average of five rigs in the U.S. (three in the DJ Basin and two in the Delaware Basin). In September 2016, Noble completed the spinoff of its wholly-owned Noble Midstream Partners LP (NBLX) at $22.50 per share. Noble Midstream owns and develops midstream assets for Noble Energy, which retains a 55% stake in NBLX. In 4Q19, Noble began production at its Leviathan gas project in offshore Israel. The project strengthens NBL’s position in the eastern Mediterranean and is expected to generate significant cash flow in 2020. The Leviathan project saw approximately 95% runtime during its first quarter after startup, with all four wells producing and export systems to Jordan and Egypt brought online.
EARNINGS & GROWTH ANALYSIS
Prior to the Chevron bid, Noble Energy projected 2020 capital spending of $750-$850 million, down 53% from its original forecast. In addition, NBL planned to curtail net oil production from onshore assets by 5,000-10,000 boe/d in May and 30,000-40,000 boe/d in June. We are maintaining our loss estimates of $1.32 and $0.54 per share, respectively. Our estimates factor in forecasts due to the pandemic.
FINANCIAL STRENGTH & DIVIDEND
On March 27, Standard & Poor’s lowered its rating to BBB-/negative from BBB/stable, citing higher-than-industry-average debt and a weak operating environment. The total was $8.632 billion, consisting of $6.982 billion in long-term borrowings and $1.650 billion in short-term borrowings. On February 15, 2018, Noble Energy began a $750 million stock repurchase program that will run through the end of 2020. It repurchased approximately 10 million shares in 1Q19, but none over the remainder of 2019. We expect the company to suspend buybacks until energy markets improve. The company had $4.4 billion in liquidity at the end of February 2020. It has no significant debt maturities until late 2024. Additionally, approximately 60% percent of NBL’s revenue base is protected through hedging contracts for oil, natural gas, and natural gas liquids or long-term contractual pricing arrangements (in the case of Israeli production).
MANAGEMENT & RISKS
CEO David Stover joined Noble Energy in 2002 and became president and COO in 2009. He previously held senior management positions at BP America, Vastar Resources, and Atlantic Richfield. As with any E&P company, the greatest risk for Noble is commodity price risk, and as has been seen over the last year, commodity prices can move markedly higher or lower based on factors that go beyond market fundamentals. We believe that the company’s strong balance sheet and new project opportunities will help to insulate it from the risks associated with such price swings.
COMPANY DESCRIPTION
Noble Energy is a leading independent energy company engaged in worldwide oil and gas exploration and production. The company operates primarily in the Rocky Mountains, the Marcellus shale, the Eagle Ford shale, the Permian base and the deepwater Gulf of Mexico, with key international operations in Israel, the U.K., and West Africa. 1932 Houston.