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Chevron (CVX) to Sell North Sea Assets to Delek Group for $2B

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In a bid to streamline portfolio, Chevron (CVX - Free Report) will divest bulk of North Sea assets in the United Kingdom to Israeli conglomerate Delek Group’s subsidiary, Ithaca Energy, for about $2 billion. The move, which is in sync with Delek Group’s and Chevron’s long-term objectives, is a win-win transaction for both. While Delek Group seeks to become a global offshore oil/gas powerhouse, Chevron is focused on revving up production and optimization of portfolio in high-return U.S. shale plays, especially the Permian Basin.

U.K-focused oil and gas explorer Ithaca Energy will fund the transaction through a mix of reserve-based lending and debt refinancing facilities. As part of the agreement, 500 Chevron employees will be transferred to Ithaca. Subject to regulatory approvals and satisfactory closing conditions, the deal is set for closure in the third quarter of this year.

Let’s Take a Closer look at the Win-Win Transaction

What’s in it for Delek Group?

Notably, Delek Group had acquired Ithaca in 2017, as part of its efforts to expand beyond Israeli markets. The latest deal is in line with Delek Group’s strategic focus on creating a world-class E&P portfolio.

The deal would add 10 producing North Sea oil and gas fields including Alba, Alder and Erskine, among others, to Ithaca’s existing North Sea portfolio, thereby lifting 2019 output forecast of the firm by 300% to around 80,000 barrels of oil equivalent per day (Boe/d). The acquisition will also enhance the company’s reserves by 150% to 225 million Boe.

The deal will make Ithaca the second largest independent explorer in the U.K. basin. Ithaca expects its production mix to be 60% oil and 40% gas, with projected average operating cost to be $17/barrel. Cash flow of the firm is expected to get a boost, aided by $2.2 billion tax allowances.

Markedly, Delek Group intends to list Ithaca on the London Stock Exchange and forecasts the unit’s annual EBITDA to be $1 billion.

What’s in it for Chevron?

The deal brings Chevron much closer to its goal of withdrawing from the aging North Sea, in a bid to streamline portfolio. The move is part of Chevron’s strategic review of global portfolio to determine the competitiveness of all its projects. The decision seems to be a prudent one, as extracting oil from North Sea is not so economical since production costs are much higher than returns. With North Sea accounting for just around 3% of production, the company had put most of its assets in the region for sale last year.

As it is, the Zacks Rank #3 (Hold) company plans to jettison $15-$20 billion worth of assets in the 2020-2022 time frame, in order to optimize portfolio and provide additional cash to investors. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

While the latest deal will heavily reduce Chevron’s North Sea footprint, the company will still retain 19.4% stake in the Clair field of Shetland — operated by BP plc (BP - Free Report) and its U.K. Global Technology Centre in Aberdeen and London. Instead, the firm wants to sharpen focus on lucrative shale exploration in Permian, and some of its major projects in the Gulf of Mexico and Kazakhstan. By 2024, Chevron is targeting Permian production of 900,000 barrels a day (bpd), which may only be surpassed by ExxonMobil that aims to produce 1,000,000 bpd within the same time period.

Other energy biggies have also scaled down their footprint in the region, in order to deepen focus on other lucrative prospects. In April, ConocoPhillips (COP - Free Report) hived off North Sea assets for nearly $2.7 billion to Chrysaor. Marathon Oil (MRO - Free Report) also inked a deal with RockRose Energy in February to exit the North Sea business.

The latest deal helps in continuation of U.S. energy companies’ trend of pulling back from the North Sea basin to concentrate on U.S. shale plays. Meanwhile, smaller oil and gas companies are grabbing stakes in the region to exploit mature oil fields in the North Sea.

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