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Noble Energy (NBL) to Acquire Clayton Williams for $3.2B

Zacks Equity Research

Noble Energy, Inc. NBL entered into a definitive agreement to acquire Clayton Williams Energy, Inc. CWEI in a bid to expand its footprint in Permian Basin – the U.S.’ most prolific oil-producing region. The transacted is anticipated to close in the second quarter of 2017.

The transaction is worth $3.2 billion, post Noble Energy’s assumption of Clayton Williams’ net debt of $500 million. Clayton Williams’ shareholders are entitled to 2.7874 shares of Noble Energy common stock and $34.75 in cash for each share of common stock held.

Noble Energy plans to finance the cash portion of the acquisition through its revolving credit facility. It expects to generate over $1 billion in proceeds in 2017 through ongoing portfolio optimization.

Noble Energy also intends to retire the outstanding debt of Clayton Williams assumed as part of the transaction. Along with general and administrative cost elimination, this retirement of debt will provide annual cost synergies of nearly $75 million to Noble Energy.

Acquisition Synergies

The transaction provides Noble Energy with large acreage position adjacent to its existing position, and solid midstream opportunities. The acquisition will render Noble Energy the second-largest Southern Delaware Basin acreage position in the industry and provide more than 4,200 drilling locations on nearly 120,000 net acres.

The acquisition equips Noble Energy with 71,000 net acres in the core of the southern Delaware Basin in Reeves and Ward counties in Texas, directly adjacent to the company’s existing 47,200 net acres.

The company expects to increase production from the acquired assets from 10 thousand barrels of oil equivalent per day (MBoe/d) to nearly 60 MBoe/d in 2020.

Noble Energy intends to exit 2017 with a total of six rigs operating in the Delaware Basin – three on its existing acreage and three on Clayton Williams’ acreage. The acquired assets are expected to be self funding and accretive to Noble Energy’s earnings and cash flow per share starting 2018.

Long-Term Outlook Updated

Noble Energy also provided an update on its four-year operating plan through 2020. Total Delaware Basin net production has been raised to 145 MBoe/d in the base plan and 180 MBoe/d in the upside plan resulting from a total of 10–13 drilling rigs in the Delaware Basin in 2020.

Full company production is anticipated to reach 600 MBoe/d in the base plan and nearly 700 MBoe/d in the upside plan in 2020. Meanwhile, operating cash flow is forecast to grow at 33% in the base plan and 45% in the upside plan, compounded annually.

Noble Energy projects total capital investment of $2.1–$2.5 billion in 2017 with total reported sales volumes in the range of 410–420 MBoe/d in 2017.

Prior Acreage Acquisition

Last week, Noble Energy completed the acquisition of 7,200 net acres in the Southern Delaware Basin in Reeves County. The acquisition price of $300 million was funded with available cash on hand.

The properties are located within and directly adjacent to Noble Energy’s existing assets in the Delaware Basin and produce nearly 2,400 barrels of oil equivalent per day (“BOE/d”). (Read more: Noble Energy Acquires Acreage, Issues Long-Term Outlook)

Peer Acquisitions in Delaware

Most of the big players are consolidating their positions in the Delaware Basin. Recently, WPX Energy Inc. WPX increased its presence in the resource-rich region through the acquisition of assets from Panther Energy Company II, LLC and Carrier Energy Partners, LLC. The deal was valued at $775 million and enabled WPX Energy to add nearly 32,000 net acres in the core area of the Delaware Basin at an average cost of $18,600 per acre, following its transformative purchase of RKI Exploration and Production in Aug 2015. (Read more: WPX Energy to Grow Oil Output with Added Acreage in Delaware)

Price Movement

Shares of Noble Energy have gained 6.6% over the last three months, outperforming the Zacks categorized Oil and Gas - Exploration and Production - United States industry’s gain of 3.4%.

The outperformance can be attributed to the decision undertaken by the Organization of Petroleum Exporting Countries (OPEC) in late Nov 2016 to cap the production of crude oil in a bid to tackle the supply glut that had been wrecking havoc on the oil industry for the last two years. The OPEC deal led to an immediate surge in oil prices, benefitting companies like Noble Energy.

Zacks Rank & Key Picks

Noble Energy carries a Zacks Rank #3 (Hold). A better-ranked stock in the same space is Sundance Energy Australia Limited SNDE.

Sundance Energy’s 2016 estimates narrowed from a loss of $3.88 to $3.31 over the last 60 days. The company’s shares have gained 24.8% over the last three months, outperforming the industry’s gain of 3.3% .The company sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

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Noble Energy Inc. (NBL): Free Stock Analysis Report
Clayton Williams Energy, Inc. (CWEI): Free Stock Analysis Report
WPX Energy, Inc. (WPX): Free Stock Analysis Report
Sundance Energy Australia Ltd. (SNDE): Free Stock Analysis Report
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