Chevron (CVX  ) bought Noble Energy (NBL  ) for $13 billion in total, $5 billion in cash and the rest in debt assumption. Many believe that this is the beginning of a consolidation in the energy space as big players will buy out smaller companies with attractive assets.

The bear market in oil has devastated many drillers whose projects are not viable at today's prices. In contrast, the bull market in oil led to the creation of so many smaller companies who are not well-capitalized enough to survive, unless oil prices miraculously move higher and then sustain those prices. This doesn't seem likely, in the short-term, as oil demand remains depressed and price gains are due to supply being cut. The recent flare-up in the coronavirus in states that were early to reopen also lengthens the timeline in which oil demand will return to normal levels.

This is clearly the bust part of the oil cycle, and one consequence of the bust cycle is that the big companies get stronger, and smaller companies are liquidated. Noble gives Chevron high-quality, proven reserves that it will be able to tap when oil prices recover. Noble has assets in the Middle East and the Permian Basin. Chevron believes the deal will save $300 million a year in operating costs for the combined entity on a pre-tax basis and increase oil reserves by 18%.

The deal valued Noble at a 12% premium to its current market price and is still subject to approval by shareholders and regulators. Chevron's stock was also higher on the deal's announcement. Last year, Chevron attempted to buy Anadarko Petroleum but was outbid by Occidental Petroleum (OXY  ).

That has turned out to be fortunate for Chevron as it was bidding $50 billion. Now, Occidental's entire market cap is $15 billion, and the company is struggling to sell Anadarko's assets to stave off bankruptcy or dilution. If Chevron had bought Anadarko, it's unlikely they could have bought Noble Energy.

Sector Impact

The deal caused a big jump among energy producers in the market that are a similar size to Noble like Occidental, Apache Corporation (APA  ), Devon (DVN  ), and EOG Resources (EOG  ). However, a portion of these gains was given back.

The energy sector is interesting because there seems to be strong evidence that production is going to be low in the coming years due to the lack of new investment in exploration over the past couple of years, and the decrease in shale output. But, there's even more conviction that demand is going to be stunted as long as the coronavirus is with us due to the reduced demand from travel.

This creates short-term negative pressure on prices. Given that so many energy companies are loaded with debt, it creates a puzzling situation. Given the long-term fundamentals, it seems like a good time to invest in the space but avoid the smaller, weaker companies that will have trouble surviving the next, few months.