Noble Energy, Inc. (CVX) Earnings Call Transcript & Summary

Good morning. My name is Crystal, and I will be your conference facilitator today. Welcome to Chevron's conference call to discuss its announced acquisition of Noble Energy. [Operator Instructions] As a reminder, this conference call is being recorded. I will now turn the conference call over to the General Manager of Investor Relations, Chevron Corporation, Mr. Wayne Borduin. Please go ahead.

Thank you, Crystal. Welcome, and thanks to everyone on the call for participating this morning. I'm Wayne Borduin, General Manager of Investor Relations. And with me today are Chevron's Chairman and CEO, Mike Wirth; Noble Energy's Chairman and CEO, Dave Stover; and Pierre Breber, our CFO. Before we get started, please be reminded that this presentation contains estimates, projections and other forward-looking statements. Please review the cautionary statement and important information for investors and stockholders on Slide 2. Now I'll turn it over to Mike.

All right. Thanks, Wayne. Moving to Slide 3. I'm pleased to announce that Chevron has entered into a merger agreement with Noble Energy, an opportunity aligned with our disciplined returns-focused strategy. This is an attractive transaction that strengthens Chevron's performance through high-quality cash-producing assets that are complementary to Chevron's global portfolio and capabilities, low-cost, proved reserve and resource additions and achievable synergies that we expect to drive accretive financial metrics and enhance our flexible capital program. Moving to Slide 4. I'd like to highlight some of the key terms that make this a compelling deal for shareholders of both companies. Each Noble Energy shareholder will receive 0.1191 Chevron shares as total consideration. They'll have continued investment in the business through ownership of shares with a 6% dividend yield, underpinned by balance sheet strength in a time of uncertainty. Chevron's shareholders should realize the incremental value that we expect the high-quality assets and synergies to deliver over time. Turning to Slide 5. The value of this deal is supported by the complementary nature of Noble Energy's core assets in the U.S., a liquids-weighted portfolio focused in the DJ and Permian Basins, assets that play to our strengths, where we believe we're uniquely positioned to maximize value. The Permian is a targeted bolt-on to our premier existing position, adding 92,000 net acres in the core of the Delaware Basin. Adjacent to our existing footprint, this will add long lateral well opportunities and allow for efficient development synergies with our existing acreage. In Colorado, the DJ adds a large, contiguous position with no leasehold drilling requirements where Noble Energy has been a very successful operator. We intend to leverage our proven factory model with Noble's strong experience there to drive further efficiencies and deliver superior results. Also, we'll add an established midstream business that is closely linked to Noble's Permian and DJ assets and a more mature Eagle Ford position. Turning to the next slide in the international portfolio. Noble Energy's large, operated position in the Eastern Mediterranean has established them as a leading player in the region. Anchored by the Leviathan and Tamar assets and supported by offtake agreements from Israel, Egypt and Jordan, these assets are expected to generate strong cash flow for decades. The opportunity in the region isn't limited to current operating assets. Noble Energy adds to our exploration portfolio in the Eastern Med, which pending final government approval, is expected to give Chevron a total of 6 exploration blocks in Egypt and a discovered resource opportunity in Cyprus. Moving to West Africa. Noble Energy has had an established position in Equatorial Guinea for decades with opportunities to continue to monetize resources through existing regional capacity. Turning to Slide 7. Noble Energy's assets further strengthen our already advantaged portfolio. The Eastern Mediterranean enhances our geographic diversity, and the U.S. onshore and West Africa adds to regional strength in both areas. With about 2 billion barrels of proved reserves, the acquisition is an attractive opportunity to add to Chevron's reserves cost efficiently and in assets that require limited near-term capital. Turning to synergies on the next slide. We expect to deliver $300 million in before-tax run rate cost reductions within a year of closing, which is expected in the fourth quarter. These cost synergies result primarily from redundant activities and corporate functions, businesses where operations overlap and high-grading opportunities within our combined exploration portfolio. Both companies have reduced capital significantly this year. Future capital levels will depend on market conditions. Our capital program will continue to have the flexibility to stay low and to gradually ramp back up when prices and demand suggest it's prudent to do so. Strong synergies, on top of robust cash generation with capital flexibility is the right combination that we expect to deliver additional free cash flow and value to our shareholders. Moving to the final slide. I want to return to some of the messages that we delivered at our Investor Day in March. Business environment around us has changed but our value proposition hasn't. We've always said that we have a high bar for M&A, and this transaction clears those hurdles. We expect Noble Energy's financials to be accretive and for their projects to compete for capital in our returns-focused portfolio. We're adding low-cost reserves and resources. And even with the additional debt, we're maintaining a strong balance sheet. And finally, we expect the assets to generate solid cash flow with minimal capital requirements, with the option to increase investments when the world demands more energy. Over the coming months, we expect to implement our integration plan with Noble's employees, who we know share a commitment for strong performance and getting results the right way, values ingrained in both our cultures. With that, I'll turn it over to Dave to make a few remarks.

Thank you, Mike. And good morning, everyone. It's a pleasure to join the Chevron team to announce this exciting combination. As you all know, Noble Energy is a leading independent E&P company, with a strong U.S. onshore portfolio, world-class international assets and significant exploration opportunities. Let me take a moment and talk for a moment about why we believe this is the right transaction and at the right time for Noble Energy. During the last few years, we made tremendous progress on our strategic objectives, including driving impressive capital efficiency gains in the DJ and Delaware basins, advancing our global gas discoveries, commencing production at the world-class Leviathan field and significantly reducing our cost structure. At Noble Energy, we are always looking for ways to maximize value. As such, the Noble Energy Board and management team conducted a thorough process supported by advisers to carefully review and consider a wide range of strategic alternatives. In addition to this merger, we assessed other potential options, including alternative mergers, acquisitions and divestitures as well as the continued execution of our stand-alone plan. The Board and management team determined that the merger with Chevron was the superior option to deliver value to our shareholders. Chevron's global scale, diversified portfolio and financial strength will ensure the value of Noble Energy's assets is maximized. We also believe Chevron is an excellent cultural fit for Noble Energy, with a shared commitment to integrity and respect for our communities and the environment. Noble shareholders will receive a premium in the form of Chevron common stock, which we view as an extremely attractive currency. The all-stock nature of the transaction gives our shareholders the opportunity to benefit from Chevron's attractive dividend and participate in the powerful upside potential of the combined company. Our Board and management team are unanimous that this transaction is in the best interest of our company and all Noble Energy shareholders. Before I turn the call back over, I'd like to thank all of our employees for their dedication and commitment to Noble Energy. This transaction is a testament to their dedication and hard work. I'm confident that the future is bright for Noble Energy and Chevron. With that, I'll turn the call over to Wayne.

Thanks, Dave. That concludes our prepared remarks. We're now ready to take your questions. [Operator Instructions] Crystal, please open the lines.

[Operator Instructions] And our first question comes from Neil Mehta from Goldman Sachs.

Dave and Mike, congratulations here on the transaction. I guess the first question was just around the synergies, the $300 million pretax number. Mike, can you help us flesh out any of the drivers behind that? And then any thoughts on NBLX as well from the midstream perspective? And how we should be thinking about that?

Yes, Neil, and thanks for your words. Look, the synergies will be partially headcount-related as we've got some redundancies in -- primarily in corporate functions. There are other synergies in high-grading the exploration portfolio, other third-party costs, consultants, office buildings, IT, lower insurance, things like that. So we think these are very achievable numbers. I think both companies have been very committed to operating cost discipline and have efforts underway to reduce those costs, and we see the opportunity here to accelerate that even further. We haven't had a chance to get into things like the supply chain to look for procurement efficiencies and other things, but I'm sure we'll see some of those as well. So we think this is a very achievable number. We've laid it out for a run rate in 1 year. We'll work hard to deliver that and hopefully do better than that. On the midstream, look, this is a good midstream business that is tightly integrated with the production operations in both the Permian and the DJ, and it's important for the efficient development of those areas. And so we look forward to bringing that in and leveraging that up with our assets in the Permian and learning more about how it supports the DJ as we get into that. So a good part of the business.

And I know we'll get a little bit more on -- in the S-4 here, but can I hear you or Dave talk more about how the transaction came together? And then, I guess, the question for Dave is it was a relatively low premium transaction, recognizing there's an equity component to it. So how did you get comfortable around the valuation?

Yes. So I'll just make a quick comment and then let Dave comment. You're right, Neil. All the details will be in the S-4 registration when it gets filed here shortly. And so I'll just let you read the story of how it happened there. And from our point of view on premium, the best deals are fair to both sides. And our Board saw this as a deal that was good for our shareholders, and Dave's Board saw the same. And that's how good deals get done. We really look at value creation in the long term, and we think this is good value for both sides. Dave, I'll let you respond as well.

Yes. Appreciate it, Mike. I think that was well said. I think as we had the chance to work with Mike's team, we got more and more comfortable and I think some of the things that we learned, it wasn't just the assets. It wasn't just the execution, but it was the overall fit of the 2 companies, the cultural aspects, how we make decisions, how we think about not just the short term but the long term. And I think when you're making a decision like this, you're looking at what's going to create the most value for your assets over time and the ability to look at this from the standpoint that the scale really matters here as you go forward. And the broader capabilities that Mike and his organization bring to this, the financial strength, commitment to shareholder return, all those things are going to continue to unlock value in these assets through decades here. So the way we looked at it in a stock-for-stock transaction, it maintained the upside exposure and minimized any downside risk. So I think all of those things are important as you think about something like this.

Our next question comes from Phil Gresh from JPMorgan.

Congratulations. Yes, I had 2 questions. First one, I guess, for Mike. Does Chevron own the minerals underneath the Noble acreage in the Permian? And as you look at Noble's current plan with 1 rig, I believe, running in the DJ and none in the Permian, perhaps you could talk about how you view the ability to efficiently integrate those assets into what you're doing today in the Permian.

Yes, Phil. So no, we own extensive mineral interest in the Permian. We don't own minerals under the acreage in Reeves County that Noble Energy has. In terms of the plan forward, we were running a couple of rigs down in Reeves before the downturn. We've got a good position. It will be much better as we combine the acreage here, and it was very competitive within our portfolio. It will get even better here as we have a deeper inventory of long lateral wells and contiguous development areas and can develop both surface infrastructure as well as the well program in a very capital-efficient manner. So that will go into our normal prioritization process. And as I said earlier, the market is not calling for more production right now, which is why we've exercised the flexibility in our capital program to bring these activity levels down. We'll bring that activity back up when we see the indicators that suggest it's appropriate to do so. I'd encourage you to think of the DJ as a more mature version of some of our other shale and tight positions, right? So we've talked a lot about the Duvernay in Canada, the Vaca Muerta in Argentina, where we're early in cycle. Noble has derisked the DJ, strong current production, understands the geology, really good acreage in the rural areas of primarily Weld County. And so that, too, will come into our overall unconventional portfolio and be prioritized for capital as we go forward with a good understanding of the opportunity and a strong track record there. Maybe it sounds like you have a second question, perhaps, to Dave.

Yes, actually, exactly. As we think about the managing of the risk side of the equation that you mentioned, Dave, one of Noble's larger customers in the Eastern Mediterranean has the ability to reduce its volume take by, I believe, up to 50% if Brent prices are below $50. So I guess, perhaps you could talk about your view on that situation right now given the near-term gas demand picture in the Eastern Mediterranean.

Yes, absolutely, Phil. As we've talked about, we've had great support, even through this downturn, if you will, with COVID impacts of things. And we're at the place now where we're getting ready to finish up this compression project that will start to have the ability to move more gas through the region and especially into Egypt, like you're talking about. So everything we've seen and so forth, everybody is gearing up and ready now to start to move more gas through there. And so I think we're in a really good place, and it's really testament to the project teams that were able to keep this on track and on schedule through all this uncertainty that's been out there in the world.

Our next question comes from Doug Leggate from Bank of America Securities.

Let me add my congratulations. So one for Dave and one for Mike, if I may. Mike, first of all, I know, again, we're going to get details in the S-4, but can you share any details on breakup fee? And if I may, you've obviously been through this before with Anadarko. I'm just curious, given the modest premium, how you expect the market rate to react. And whether in the event that there was another situation to evolve, where you would stand in terms of your commitment to this deal in terms of whether the upside potential would justify you taking a harder look at the offer terms?

Yes, Doug, look, this is a public company merger. It's similar to other public company mergers, and the details, including the particulars on a breakup fee, will be in the filings when those are made. So I'll just refer you to those. Look, as far as the reference to potential interloper risk, we do deals that are fair to both sides. Both Boards strongly support this, unanimously support this, and we're very confident that the deal will close.

Dave, you've just gone through several years developing a world-class asset. The synergies alone, $300 million, if I simplify that on a annuitized basis, post 2021, that's worth 50% more than your stock price, $5 a share. There's a lot of other regional LNG players or those who already have assets in the region. I'm just trying to understand why you're selling now and why you're selling at this valuation.

Well I think, Doug, it gets back to the things I talked about earlier that for the right opportunity with the right partner, if you will, that you look at how do you create the most value for your assets long term. And I think when you look at the financial strength now of this combined company, the broader capabilities to bring to that asset base, I think we looked at it as an opportunity over the long term just to create more value and actually enhance additional opportunities going forward. So I think, as Mike said, it's something that both companies support and look at from a standpoint of create the most value and types of things this industry needs to be doing.

Our next question comes from Jeanine Wai from Barclays.

My question is for Mike, and maybe just following up on Phil's questions. I was just wondering if you could provide your view of natural gas supply/demand in the Eastern Med. And I guess my follow-up would be what specific LNG opportunities do you see in the region, either on a brownfield or a greenfield or both?

Yes. So Jeanine, look, the Eastern Med is proving to be really quite a prolific hydrocarbon basin. And Noble was right there at the very beginning and made some bold moves to make early discoveries and take the risk to begin to commercialize the resource. And so they've got a great position, a lot of great knowledge. And demand for gas in the Eastern Med region as well as more broadly continues to grow. It's widely, I think, acknowledged that it's a fuel that will continue to displace coal for power generation. And as economies grow in that region and beyond, we think that the demand will continue to support further development. In terms of LNG, look, there's idle -- there's some idle LNG capacity in Egypt right now that can leverage this as feed gas. There's been some ongoing discussions and, in fact, announcements here over the last day or 2 about the desire or the intent to establish pipe capacity into the European markets. And I think when you've got a large, low-cost resource base like this proximate to large economies, we will find ways to move the gas to market in a manner that's competitive. And so obviously, commercialization of that will be a very important activity. It's something that we do around the world with many different customers in many different countries and in many different modes of transportation. So this fits in with strong capabilities that we have, and we just see it as a very important resource for the future of the region.

Our next question comes from Jason Gammel from Jefferies.

Congratulations, everyone. Maybe just taking a step back, Mike, can you talk about, with all the opportunities that are out there and available right now, what led Noble to the top of your list in terms of the transaction that you wanted to pursue?

Sure. I mean, Jason, I've tried to be pretty consistent on this question as it gets asked over time. At the top of the list are quality assets, and we've got a pretty high bar for what that looks like, including the ability to compete for capital within our portfolio against what's already a strong set of assets. We're very focused on low cost of supply, because we believe through the cycles, you absolutely have to have low supply costs. We've shifted our portfolio towards one with a more flexible capital component so that as we experience the market cycles, we have a greater ability to respond to those with flexible capital. Obviously, we've talked about a culture fit, and I have to tell you it's very strong on many attributes: purpose, values, commitment to safety, a number of the things that Dave spoke about. And then you've got to find a meeting of the minds on value and forward strategy and a company that is prepared to talk about a combination. And so I guess the last thing I'll say is we get asked a lot about pure-play Permian. And we're already big in the Permian, and getting bigger isn't necessarily the goal. Getting better certainly is important. And so the fact that this brings with it a strong position, a very strong position in the Eastern Med, a basin where we've got attractive exploration opportunities. And Noble has a strong currently-producing asset with the big capital spend behind it now, it just gives us a really solid position in another basin that helps improve portfolio diversity and mitigate risk. So this deal ticks all the boxes that we've consistently articulated as the kinds of things that we would be looking for, and we're very excited. We think it's a good deal for the shareholders of both companies.

That's very helpful, Mike. And maybe I could just follow up with, you referenced the $40 Brent price needed for accretion on this deal. Anything specific, underlying assumptions that you can provide detail on that get you to that number?