Integrated Oil & Gas
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CVX $157
25 Oct 2023 |
With Hess purchase, Chevron gains massive South American oil patch
Chevron (CVX $157) has been, and remains, our number one play in the energy field. One of the reasons for its ongoing position in the Penn Global Leaders Club has been the astute leadership of CEO Mike Wirth. He just displayed his abilities once again with the masterful pickup of Hess Corp (HES $155)—an exploration and production (E&P) company with key assets in the Bakken Shale, Guyana, the Gulf of Mexico, and Southeast Asia. Chevron will pay $53 billion in an all-stock deal to acquire the driller, which we consider a steal (the $171 purchase price equates to just a 10% premium over where the shares have been trading). The most exciting aspect to the acquisition revolves around Hess’ Guyana assets—arguably the hottest oil patch in the world. Guyana’s Stabroek Block is a 6.6-million-acre offshore area currently controlled by Hess, Exxon Mobil (XOM $108), and China’s CNOOC. It also happens to represent the world’s largest crude discovery of the past decade. Once the deal is finalized, Chevron will control 30% of the field, with Exxon controlling another 45% and CNOOC owning the remaining 25%. We believe this represents the growth driver going forward that Chevron has arguably been missing. Chevron already controlled a large position in the Permian Basin, thanks in good measure to its recent acquisition of Noble Energy. That deal also gave the firm access to critical natural gas projects in the eastern Mediterranean—holdings which supply massive amounts of natural gas to Israel, Jordan, and Egypt. With a lack of available funding for new fossil fuel projects, acquisitions have been the leading strategy for growth, and Chevron has proven yet again how skilled it is in that arena. As is typical in an acquisition, Chevron shares dropped a few percentage points on news of the deal while Hess shares rallied. Sitting at $157, off 10% for the year, Chevron looks very attractive once again. We would place a fair value of $200 on CVX shares. The 4% dividend yield is a nice bonus. |
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CVX
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Chevron to buy Noble Energy for $5 billion
(20 Jul 2020) Somewhat incredibly, we now own only one energy position in the Penn Global Leaders Club: Chevron Corp (CVX $52-$85-$127). On Monday, the $160 billion integrated oil and gas giant announced that it would buy oil and gas exploration and production company Noble Energy (NBL $3-$10-$27) for $5 billion in an all-stock transaction. Based on the nightmare scenario which has been playing out for US E&P companies since the pandemic, why on earth would Chevron agree to this deal? Actually, there are a couple of good reasons. By owning Noble, Chevron will vastly expand its footprint in the Permian Basin, and they are getting the company at about half its summer, 2019 value. Here's the part we find most enticing, however: Noble has critical natural gas projects in the eastern Med, and these holdings supply enormous amounts of natural gas to Israel, Jordan, and Egypt. Above and beyond the current supply levels, the natural gas demand in these Mideastern countries will only grow as coal-powered plants are shunned. We knew there would be bankruptcies and M&A activity in this industry due to the precipitous drop in oil and gas prices since the pandemic; this deal is a brilliant example of the latter. Chevron was, in our opinion, the most well-managed integrated oil company in the business, with mega-talented Mike Wirth at the helm. This deal supports our opinion. We think back to the foiled Anadarko deal—foiled by Warren Buffett, who helped Occidental Petroleum (OXY) outbid Chevron—and we have to laugh. Chevron should send a THANK YOU card to Buffett. Occidental paid $38 billion for Anadarko thanks to Buffett; OXY now has a market cap of $15 billion. Is there a point at which the "oracle" moniker goes away? |
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RDSA
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Shell cuts dividend for first time since WWII
(30 Apr 2020) As alluded to above, big integrated oil companies continue to get pounded by demand destruction. To illustrate: Shares of Royal Dutch Shell (RDSA $21-$34-$66) have fallen so far that the company now has a dividend yield of 10%—up from 5% when shares were $66 apiece. Obviously, this is unsustainable, forcing the company to do something it hasn't done since World War II: cut its dividend. Retroactive to the first quarter, RDSA shares will have a payout of $0.16, or 66% less than the previous rate. Shell will also cut its capital expenditures for the year from $25 billion to $20 billion, and end all share buybacks. Each of these moves is needed, but that didn't stop investors from pushing RDSA shares down 11% on the news. Interestingly, competitor BP (BP $24) announced it will not cut its dividend rate, which currently yields 9.7%. This despite the fact that the multiple on BP shares (22) is over double that of Royal Dutch (9). In synopsis, we wouldn't be buying any new positions in big oil right now, and we wouldn't be keen on selling existing positions at this level. Our favorite big oil name remains US-based Chevron Corp (CVX $93). |
(30 Mar 2017) Penn member ConocoPhillips pops 7% at open on sale of assets. Penn Global Leaders Club member ConocoPhillips (COP $38-$49-$53) jumped 7% at Thursday's opening bell on news that the $60 billion integrated energy company would sell off some assets. The sale of its 50% stake in the Foster Creek and Christina Lake (FCCL) Oil Sands Partnership to Cenovus Energy (CVE $11-$12-$17) for $11 billion in cash and 208 million ($2.5 billion) shares of CVE was a great tactical move. The company will retain the benefits of the Canadian assets via their CVE shares, and it will use the cash proceeds to pay down its outstanding debt load (from $27 billion to $20 billion) and repurchase about $6 billion of stock. Win-win-win.
(07 Mar 2017) Exxon Mobil to create 45,000 new jobs in US. Massive US energy firm, $345 billion Exxon Mobil (XOM $81-$83-$96), announced that it will spend $20 billion on its infrastructure along the US Gulf Coast over the next five years and create 45,000 new permanent jobs in the process. The jobs are projected to have an average salary of $100,000 per year. In a clear nod to the new administration's policies, the money will be used to fund refining and chemical manufacturing projects at 11 proposed and existing sites along the coasts of Texas and Louisiana. The last refinery in the US was built in 1977, a condition the Trump administration called abhorrent. Penn members, see the Trading Desk for guidance.