The first major shale deal after the worst oil price collapse in five years is a model for future transactions that promises to quickly change the industry as companies expand in new areas or soak up struggling rivals.
Noble Energy Inc.’s $2.1 billion all-stock purchase of Rosetta Resources Inc. is poised to be an opening salvo in a long-predicted wave of industry consolidation that’s been slow to materialize since crude fell by more than half since June.
As a stock-for-stock deal, Rosetta shareholders would see the benefit from a rebound in oil prices, a key sticking point after the value of North American energy companies fell by more than $200 billion since June, according to data compiled by Bloomberg.
“Both shareholders then get to participate in the upside going forward,” Noble Chairman and Chief Executive Officer Dave Stover said Monday in an interview. Such deals will give shareholders more confidence that they’ll benefit from shale mergers by creating “a stronger company overall.”
Rosetta shareholders will get 0.542 Noble share for each share they hold, giving them 9.6% of the outstanding shares of Noble, according to a statement Monday. The deal values Rosetta at $26.62 a share -- 38% more than the producer’s closing price on Friday.
The premium is below average for the past five years, according to Fadel Gheit, a New York-based analyst for Oppenheimer & Co. That’s a signal that there are more deals to come as buyers and sellers come together on price.
“We’re going to see a lot of mergers and acquisitions,” Gheit said Monday in a telephone interview. “Everybody is looking for the big deal.”
Investors didn’t immediately welcome the acquisition, as Noble’s shares fell as much as 7.8%, the most intraday in four months, and were down 6.6% to $45.90 at 12:13 p.m. in New York. Still, the deal indicates merger activity is returning to the market, Neal Dingmann, an analyst at SunTrust Banks Inc., said in a note to investors Monday.
Other takeover targets are likely to have operations in West Texas’s Permian Basin, including Matador Resources Co., Callon Petroleum Co., Carrizo Oil & Gas Inc. and other smaller companies similar to Rosetta, he said. Concho Resources Inc. and Pioneer Natural Resources Co. are larger companies that could be attractive to a buyer with deeper pockets, Dingmann said.
Martijn Rats, an oil analyst at Morgan Stanley, said in a report on Monday that M&A was “arguably” a cheaper option for growth than organic investment. “Upstream M&A will likely accelerate as confidence grows,” he said.
For months after the oil market collapsed, deals were stalled by disagreements on valuation as sellers insisted on a higher price than buyers were willing to pay, and the bottom of the downturn remained uncertain. Now, an oil rally has signaled a potential rebound, with prices up more than 30 percent in the past seven weeks.
Noble’s transaction follows a decline in deal value and volume among oil and gas producers during the first three months of the year, according to a Monday report by consultant PricewaterhouseCoopers LLP.
PricewaterhouseCoopers tallied 12 transactions, a 60% decline from the year-earlier quarter. Deal value dropped 72%, to $3.6 billion. The Permian was the most-active field for deals in the quarter, followed by the Eagle Ford, according to the report.
“The velocity and magnitude of the decline in oil prices have caused companies to focus internally on cost reduction and productivity enhancement activities, which have taken attention away from M&A as a growth vehicle,” Doug Meier, the consulting firm’s energy sector deals leader, said in a statement.
“The current low price environment may present opportunities for potential acquirers who have the balance sheets to finance deals and the investing horizon to see through the current lows of the business cycle,” he said.
The current deal comes as major international explorers and shale giants from Exxon Mobil Corp. to EOG Resources Inc. have all signaled an interest in taking advantage of lower valuations to add to their North American shale resources.
The goal is either to expand existing land positions in the major U.S. drilling areas or to acquire access to a new area, as was the case in the Noble-Rosetta deal.
With Rosetta, Noble will add 1,800 drilling locations in two of the three biggest U.S. shale oil fields. Rosetta’s assets include 50,000 acres in the Eagle Ford and 56,000 acres in the Permian. Rosetta produced 66,000 boepd in the first quarter from the two regions, of which more than 60 percent was liquids.
“It’s really the quality of the asset, the inventory, that attracted us,” Noble CEO Stover said.
Noble will assume Rosetta’s net debt of $1.8 billion, the Houston-based companies said on Monday.
The largest takeover in the sector announced this year is the pending $53 billion purchase of BG Group Plc by Royal Dutch Shell Plc.