The first major bidding war has broken out in the oil-rich Permian Basin in the southwestern U.S.
After being rebuffed several times, Occidental Petroleum Corp. on Wednesday made public a $38-billion offer to buy Anadarko Petroleum Corp., seeking to break up a proposed takeover by Chevron Corp. The $76-a-share cash-and-stock bid for the oil and natural gas producer is 20% more than Chevron’s $33-billion April 12 agreement.
The acquisition would be the largest ever proposed by Occidental, which has a market value of $46.6 billion, and would be the biggest purchase of an oil producer in at least four years. It would require Anadarko to pay a $1-billion breakup fee to Chevron. Occidental’s offer would pull together two second-tier oil and natural gas producers, as opposed to Chevron’s bid to create another “ultramajor” to rival Exxon Mobil Corp.
The move drew critical initial reviews from some analysts, including Mizuho Securities USA’s Paul Sankey, who said major investors have told him they won’t support the bid.
Occidental is “really ripping up the playbook here ... we suspect with a great degree of hubris and management ego,” Sankey wrote in a note to clients. “We think the bid is a very bad idea. So does pretty much absolutely everyone we talk to, that includes front page Oxy shareholders who are very unhappy, to say the least.”
Anadarko’s shares jumped 11.6% to $71.40. Occidental’s stock slid more than 4% before recovering much of that loss; it ended down 0.6% at $62 a share. Chevron shares fell 3.1% to $118.28.
Bidding wars are “not typical” in the oil industry, Biraj Borkhataria, an analyst for RBC Capital Markets, said in a note Wednesday. He estimated Chevron could raise its $65-a-share bid by $9 a share.
Sankey, meanwhile, wrote Wednesday that Chevron may add $5 to settle the deal, but also “might just tough this out,” given the uncertainty surrounding shareholder approval for Occidental.
Chevron won’t just let it go, said Rob Thummel, managing director at Tortoise Capital Advisors, which manages energy-related assets. “Chevron will fight because acreage in Permian fits so well with its existing acreage, increasing the potential for better-than-expected operational synergies.”
Acquiring Anadarko — based in the Woodlands, Texas — would bolster Occidental’s leading position in the Permian Basin in West Texas and New Mexico. The Permian is the world’s fast-growing major oil patch and has helped to turn the United States into a net exporter, also making it a bigger producer than Saudi Arabia. This year, Chevron unveiled ambitious growth plans for the basin.
Representatives for Chevron and Anadarko didn’t immediately respond to requests for comment.
In a letter to Anadarko’s board of directors, Occidental Chief Executive Vicki Hollub said her company has made three bids since late March. Occidental said it has completed its due diligence on the deal and has financing lined up with Bank of America Merrill Lynch and Citigroup Inc.
Occidental is offering 50% cash and 50% stock, and it’s proposing $10 billion to $15 billion of asset disposals as part of the deal. For comparison, Chevron said it would sell $15 billion to $20 billion of assets from 2020 to 2022. Occidental said it identified $3.5 billion in annual free cash flow improvements that it can implement by 2021, comprising $2 billion in annual pretax cost cuts and $1.5 billion of capital reduction.
The Occidental offer may not be as appealing as Chevron’s to Anadarko shareholders despite the higher price. Occidental’s smaller size and balance sheet compared with Chevron mean there may be more uncertainty over its prospects of completing a deal. And it’s not immediately obvious how Occidental would fund Anadarko’s giant liquefied natural gas plant that’s being developed in Mozambique, although Hollub said Wednesday on a conference call with analysts that her company is capable of handling the project.
Bloomberg Intelligence senior industry analyst Vincent G. Piazza said Occidental would need to sell off assets to fund a deal.
“Occidental’s capital structure and debt would shift more significantly than Chevron’s, which has a sizable balance sheet and better-fitting assets,” Piazza said. “We’re uncertain how Anadarko’s Gulf of Mexico assets or its LNG project are corporate fits, though the bid extends the acquisition drama and puts the ball in Chevron’s court to woo shareholders.”
Tudor Pickering Holt & Co. analysts said in a note there are other deals on the market that would make better sense for Occidental, offering acreage that fits better with the company’s current footprint in the Permian Basin. Besides a Permian presence, Anadarko has operations in Colorado and the Mozambique project.
“There is no asset overlap outside of the Permian Basin between the two companies,” Keybanc Capital Markets Inc. analyst Leo Mariani said in a note. Chevron “is a much larger company and a potential bidding war for the company is not in the best interest of” Occidental shareholders.