Shares of Rosetta Resources Inc. (NASDAQ:ROSE) continued to rally Monday, soaring 28 percent to $25.21 in afternoon trading, after rival Noble Energy Inc. (NYSE:NBL) announced plans to buy the energy producer in an all-stock transaction valued at $2.1 billion. The transaction marks the first major deal among U.S. shale oil producers this year and could spark merger and acquisition activity in the sector, amid the precipitous drop in global crude oil prices over the last year.
Noble Energy's stock price dropped nearly 6 percent to $45.31.
Crude oil has lost nearly 50 percent of its value since June, and most market professionals have never seen this kind of oil decline, coupled with a strong dollar-related earnings headwind, Brad McMillan, chief investment officer at Commonwealth Financial Network, told International Business Times. The robust dollar, which has gained around 15 percent against major world currencies in the past six months, is also a huge drag on growth for the benchmark S&P 500 because the index’s companies derive more than 40 percent their revenue overseas.
“Historically, you’ve seen earnings headwinds from a lack of domestic demand, but this is not the case,” McMillan said. “You’re going to see oil companies modify their cost structure by shutting down their highest-cost producers and moving over to lower-cost producers. Even starting to take opportunities in the form of M&A with smaller competitors.”
Oil and natural gas producer Noble Energy, which has a market value of $19 billion, has a diversified portfolio of both onshore and offshore projects, and operates in five core areas: the DJ Basin (onshore United States); the Marcellus Shale (onshore United States), deepwater Gulf of Mexico (offshore United States), offshore West Africa and offshore Eastern Mediterranean.
Rosetta, which has a market capitalization of $1 billion, operates in the Eagle Ford shale in South Texas and in the Permian Basin in West Texas. The Houston-based company produced 66,000 barrels of oil equivalent per day in the first quarter of 2015, and year-end 2014 proven reserves were 282 million barrels of oil equivalent. Rosetta's liquids-rich asset base includes approximately 50,000 acres in the Eagle Ford Shale and 56,000 acres in the Permian Basin.
Noble Energy anticipates a compounded annual production growth rate from these assets over the next several years around 15 percent, generating positive free cash flow on an annual basis. Noble will also assume Rosetta's net debt of $1.8 billion, as of March 31. Rosetta shareholders will receive 0.542 Noble shares for each share they now hold, an implied value of $26.62 per share.