Chevron (NYSE:CVX) has decided to acquire Noble Energy (NASDAQ:NBL) in a $5 billion deal, expanding its footprint in U.S. shale and in the Eastern Mediterranean. The acquisition is the first major M&A deal since the onset of the global pandemic.
Noble Energy is active in the DJ Basin and in the Permian. The deal—totaling $13 billion when including debt—will increase Chevron’s proved reserves by 18 percent from year-end 2019 levels. “This is a cost-effective opportunity for Chevron to acquire additional proved reserves and resources. Noble Energy’s multi-asset, high-quality portfolio will enhance geographic diversity, increase capital flexibility, and improve our ability to generate strong cash flow,” Chevron CEO Michael Wirth said in a statement.
Chevron’s share price was down 1.5 percent in early trading, while Noble’s was up nearly 6 percent.
The move will make Chevron a big holder of natural gas assets in the Eastern Mediterranean. The American oil major will take over the massive Leviathan gas field, and add momentum to Israel’s plan to develop its offshore gas reserves. Chevron is also inserting itself into the very complicated web of politics of the region, with disputed borders and conflicting interests from more than a few countries laying claim to the gas fields.
Last year, Total's (NYSE:TOT) CEO Patrick Pouyanne said that investing in Israel was “too complicated.”
The Eastern Mediterranean is sitting on enormous gas reserves, with giant fields in Egyptian, Israeli and Cypriot waters. But the maritime boundaries are disputed, and the Turkish government has sent naval ships to deter drilling in what Ankara says is Turkish territory.
Years ago, the development of Eastern Mediterranean gas was often described as a potential solution for peace in the region, a line of argument promoted by Israel, Egypt, Greece and the U.S. government (both the Obama and the Trump administrations). In the case of Israel and Egypt, their gas trade has grown, so there is an argument that gas has brought them together.
But gas is also inflaming tensions in the region, as Turkey feels that it has largely been cut out of the prize. Cyprus is hoping to develop gas off its coast, which has angered the Turkish government since it recognizes Northern Cyprus in a five-decade-old conflict over control of the island. Cyprus, Greece, the EU and companies operating in Cypriot waters believe Turkey is simply engaging in a geopolitical battle to prevent gas drilling from benefiting its rivals.
Coincidentally, on Sunday, just as Chevron was announcing its deal to take over Noble Energy, Israel’s cabinet approved a multinational deal to push forward the East Med pipeline, a long-distance natural gas pipeline that will carry gas from the Eastern Mediterranean to Greece and Italy. The project is still riddled with risk, and no final investment decision has been made, but the governments involved are intent on pushing it forward. If built, the pipeline would open up more markets for further gas development. The pipeline is another issue that has ratcheted up tension with Turkey.
It is against this complex backdrop of conflict that Chevron enters. Proponents of developing the region’s gas will likely view the entrance of an international oil major as a positive sign. Chevron views the assets as one of the most attractive parts of the Noble (NYSE:NE) acquisition, but it also carries risk.
Meanwhile, one of the other reasons Chevron wants Noble Energy is to expand its U.S. shale presence. Chevron walked away from a very pricey acquisition of Anadarko Petroleum (NYSE:APC) last year, allowing Occidental Petroleum (NYSE:OXY) to fork over $38 billion instead. Occidental prevailed in the bidding war; a move now widely viewed as a colossal mistake.
Now, Chevron adds shale acreage at a fraction of the price paid by Occidental. Noble’s holdings in the DJ Basin “is a proven de-risked unconventional basin that…gives us another piston in the unconventional engine,” Chevron’s CEO Michael Wirth said.
The problem for Chevron will be the same facing shale drillers everywhere. Shale has been a financial bust over the past decade. Chevron itself had to write down more than $10 billion in shale gas assets in late 2019. The purchase of Noble Energy is effectively doubling down on a strategy that has demonstrated that it can produce lots of oil and gas, but has not demonstrated that it can generate positive cash.