Two weeks ago I wrote a Real Money column about the absolute fleecing of Dominion (D) by the Oracle himself, Warren Buffett, in Berkshire's (BRK.B) purchase of Dominion's natural gas transmission assets. Now, I feel compelled to write a bonus column about a similarly one-sided transaction in the energy industry. Chevron (CVX) and Noble Energy (NBL) announced Monday morning that Chevron would acquire Noble for 58 million shares in an all-stock transaction that values Noble's equity at $5 billion, or about $10.38 per NBL share.
This is absolute steal for Chevron, and as Yogi would say, deja vu all over again. This is not an asset purchase; Chevron is buying the complete Noble Energy enterprise. So, in addition to assuming the $8 billion in net debt, non-controlling interest that Noble had as of March 31, Chevron gets Noble's holding in Noble Midstream Partners. As of Dec. 31, Noble Energy owned 62.6% of the limited partner units of Noble Midstream Partners (NBLX) . So, Chevron is buying $500 million worth of valuable transmission assets in the deal, and that lowers the price for "core Noble" to an equity value of $4.5 billion.
Once again a veteran operator, in this case Chevron's Michael Wirth, has purchased midstream assets for a heavy discount to a valuation that would have prevailed in the pre-Covid-19 era. On July 20, 2018, NBLX was trading at $52.10. Monday morning Chevron purchased nearly two-thirds of it for an assumed value of $9 per share, which actually reflects the deal premium (NBLX shares have risen 13% Monday) in addition to the intrinsic value of the pipelines.
So, as I mentioned in the Buffett column, we live in a zero-sum world and a deal that is so beneficial to one side cannot be good for both. Simply put, Noble Energy shareholders are getting shafted.
On July 20, 2018, NBL shares closed at $34.68. So, the announced takeout price of $10.38 (the deal actually has a lower current value, since CVX shares have fallen Monday) is what we used to call, in my sell-side days, a "takeunder." Not only did Noble management sell the company for a fire-sale valuation, it managed to not get a single dollar of cash in the deal. So, Noble Energy shareholders are receiving compensation in the form of shares of another energy company. The market's aversion to the oil majors is easily seen in a glance at their stock charts or a reading of Chevron's 6% yield and the 8% yield sported by Exxon Mobil.
As always, the bond market has the last word. Noble Energy's benchmark 6% 3/2041 senior notes (NBL.AD on NYSE) had recovered to par last week, after a swoon to nearly 60 cents on the dollar as the bond market collapsed in mid-March. Unlike a lot of its peers, especially the smaller ones, Noble was not a distressed company in July 2020. Far from it. So, with no major debt maturiites until 2023, a credit profile aided by the slashing of NBL's common dividend and a stabilization in oil prices of late, why would Noble management sell for such a low price now?
I can't answer that.
I can note that Chevron has acquired a strong position in the especially-attractive Southern Delaware (Reeves County) portion of Texas's Permian Basin, a solid position in Colorado's DJ basin and a 40% operating interest in the Leviathan natural gas play in the Mediterranean Sea off the coast of Israel. In return, Noble shareholders will own a whopping 3% of the "new" Chevron. Noble management found that arrangement more palatable than owning 100% of the "old" Noble.
This deal is once again proof that the big guys with access to capital -- like Chevron and Berkshire -- will make mincemeat of the little guys in any kind of economic downturn. That's how value is created in cyclical industries and Mike Wirth and Warren Buffett know that better than anyone.