The first major E&P sector deal since the oil price fall in April has important pay implications for all sectors of the market
July 30, 2020
In our May Newsletter, we wrote: “The current state of the oil and gas industry points to a strategy of cost cutting, consolidation and collaboration. Conserving cash resources is the priority – for all firms but particularly for the small and mid-size players, whose balance sheets are not so strong as those of the large firms.”
Chevron’s agreed $13bn offer to acquire Noble Energy, announced on 20 July, is an example of an opportunistic oil major seizing the chance to acquire strategic, cash-generating assets without breaking the bank. This is the first significant corporate transaction in the sector since the oil price collapsed in April. We are sure it will not be the last.
At the time of writing, the market price of a barrel of Brent crude is about $44 and the West Texas Intermediate price per barrel is about $41. At these levels, the market price of oil is lower than the estimated break-even point for many E&P companies. North Sea operators, facing higher production costs than in many other areas, are more at risk than most.
The Chevron/Noble deal is interesting from another aspect, too. It strengthens Chevron’s position in natural gas, making Chevron a major gas player in the Eastern Mediterranean and the Middle East. It is part of a diversification strategy, which also strengthens Chevron’s position at home in the USA, where Noble has valuable on-shore assets.
Noble’s assets also include off-shore wells in western Africa. E&P companies looking to reposition their business models through energy transition and diversification can see opportunities to acquire gas assets on the African continent, where a number of recent discoveries have been made.
An increase in similar transactions might also help to allay concerns about a lack of private equity exit strategies. Private equity has made significant investments in North Sea and UKCS E&P companies and firms will be looking for exit opportunities.
A trend we have seen to be on the increase might help.
Corporate venture capital (CVC) investment – major industry players, not only in the energy sector but across the economy, establishing their own venture capital arms to invest in and nurture new and differentiating technologies, as part of their diversification and ESG strategies, is a way for financially strong companies to put their cash to good use. Some investments will be sold while others will be retained and may eventually become fully integrated within the wider, diversified group.
Global oil majors have certainly embraced CVC and if the Chevron/Noble deal is the tip of the iceberg (and assuming that the number of acquisitions and divestments in the oil and gas sector increases, as forecast) companies operating long-term incentive plans, as well as the plan participants, will want to be certain of their position in the event of a change in control or termination of employment. We are currently advising a world leader on remuneration strategies tailored for its global CVC teams.
In particular, the deal on exit for executives managing the venture capital backed businesses across the wider economy needs to be understood properly. There have been frequent occasions where a sale to a third party trade buyer has left management in a precarious position. Management teams will want to make sure they understand their position as it might be difficult (and may be impossible, in practice) to renegotiate at a later date. MM&K is working with the management teams, in a wide range of businesses, that may be ripe for acquisition.
MM&K advises extensively on directors’ and executives’ remuneration policy and practice across a wide range of sectors, including the oil and gas sector, and is a leading independent adviser on remuneration to PE and VC firms and their portfolio companies. We expect to see an increase in CVC activity as companies across the economy seek to diversify, develop new technologies and reduce their carbon footprint.