Chevron is buying Anadarko. That would make it as big as Exxon and Shell
Chevron Corp. agreed to buy Anadarko Petroleum Corp. in a $33-billion deal that would add U.S. shale oil and African liquefied natural gas to Chevron’s purview and put it in the top ranks of the world’s largest energy companies.
The takeover would put Chevron neck and neck with the oil and gas production of Exxon Mobil Corp. and Royal Dutch Shell, both of which have dominated Big Oil over the last decade. The combined company’s cash flow last year, $36.5 billion, would have exceeded Exxon’s.
“Chevron now joins the ranks of the ultramajors,” Roy Martin, an analyst at Wood Mackenzie Ltd., said in a note.
U.S. crude prices are up about 40% this year, and the companies put the enterprise value of the deal at $50 billion.
The $65-per-share stock-and-cash deal announced Friday sees Chevron doubling down on its expansion into the fast-expanding Permian Basin of West Texas and New Mexico, while also increasing its exposure to liquefied natural gas with Anadarko’s project in Mozambique. The combined company would sell $15 billion to $20 billion of assets from 2020 to 2022 to reduce debt and return cash to investors.
Chevron would keep its headquarters in San Ramon, Calif.
Occidental Petroleum Corp. had made a $70-per-share bid for Anadarko and is now weighing whether to move forward with a counteroffer, according to a person familiar with the matter. CNBC reported Occidental’s bid earlier.
Anadarko shares leaped 32% on Friday to $61.78, but they didn’t trade above the offer price, implying investors don’t expect a bidding war. Chevron stock slid 4.9% to $119.76 a share.
The transaction is the biggest strategic move yet for Michael Wirth, the 58-year-old chemical engineer who became Chevron’s chief executive 14 months ago. He has quickly shaken up the company by announcing an aggressive expansion plan for the Permian.
“We will now see Chevron emerging as the clear leader among all Permian players, both in terms of production growth and as a cost leader,” said Per Magnus Nysveen, head of research at consultant Rystad Energy in Oslo.
Anadarko, which is based in the Woodlands, Texas, had long been rumored as a takeover target for the world’s largest oil companies. It offers a suite of assets including a massive LNG facility in Mozambique that’s racing against Exxon’s project to be the first operating in that country.
The deal is the biggest takeover in the oil and gas industry since Shell’s $61-billion purchase of BG Group in 2015, according to data compiled by Bloomberg. Widening the measure to include chemicals and state-owned companies, both would be eclipsed by Saudi Aramco’s $69-billion acquisition of a majority stake in Saudi petrochemical company Sabic this year.
The premium is high compared with most other acquisitions of oil companies valued at more than $1 billion. The average premium in such transactions was 11% last year and 22% in 2017, according to data compiled by Bloomberg. Chevron’s bid is a 39% premium above Anadarko’s Thursday closing price.
That’s still something of a bargain, investors said.
Anadarko stock traded at about $77 a share less than a year ago. The deal values Anadarko at only about 7.5 times its earnings, compared with an average of 8.9 for comparable deals, data compiled by Bloomberg show.
“I don’t necessarily feel like they overpaid even with the premium embedded in the deal,” said Noah Barrett, who helps manage $328 billion at Janus Capital Management in Denver. Chevron is “getting good assets at a fairly reasonable price.”
Like other U.S. explorers, Anadarko had been punished by investors for participating in a shale boom that has delivered record crude production but little in the way of cash returns. Its wide range of assets from the Permian Basin to the Gulf of Mexico and Mozambique left investors exposed to a multitude of risks in the global oil market. Its Colorado operations, meanwhile, were devalued due to a state crackdown on oil and gas drilling.
“Chevron pulled off something of a steal acquiring Anadarko at the price they did,” said Michael Roomberg, a fund manager at Miller/Howard Investments Inc., which manages $5 billion including Anadarko stock.
And for Chevron, “consolidation in deep water and the shales makes complete industrial sense,” said Christyan Malek, the head of Europe, Middle East and Africa oil and gas research at JPMorgan Chase & Co. “It gives the combined entity the ability to high-grade its assets and focus on where the best cash returns are.”
Under the deal, Chevron would acquire all outstanding Anadarko shares for $65 each, paying a mixture of cash and stock. The transaction has a breakup fee equivalent to about 3% of the deal value, according to a person familiar with the matter.
Chevron said the combined entity would have had daily output of 3.596 million barrels equivalent of oil last year, closing in on Shell’s 3.666 million. Exxon had average production last year of 3.833 million.
Investors would receive 0.3869 of a share of Chevron and $16.25 in cash for each Anadarko share.
Chevron would issue 200 million shares and pay $8 billion in cash. It also would assume about $15 billion of net debt, giving Anadarko an enterprise value of $50 billion. Chevron is increasing its annual stock buybacks to $5 billion from $1 billion. That means all the shares issued to buy Anadarko would be retired in less than five years.
Chevron expects the deal to add to free cash flow and earnings per share one year after closing, assuming a Brent crude price of $60 a barrel. It also expects run-rate cost synergies of $1 billion before tax and capital spending cuts of $1 billion.
The deal is seen closing in the second half of the year, subject to Anadarko shareholder and regulatory approvals. Credit Suisse Group AG was financial advisor to Chevron while Paul, Weiss, Rifkind, Wharton & Garrison was legal advisor. Evercore Inc. and Goldman Sachs Group Inc. advised Anadarko alongside law firms Wachtell, Lipton, Rosen & Katz and Vinson & Elkins.
“Chevron’s deal for Anadarko escalates the race with Exxon Mobil for the Permian,” said Bloomberg industry analyst Fernando Valle and associate analyst Jonathan Mardini. “Delivery of synergies and efficiencies will be critical in narrowing or overtaking its peers’ returns.”
The deal may put pressure on Shell to seek assets in the Permian, where the Anglo-Dutch company has said it wants to grow. Oil executives and bankers had in the past speculated that Shell may buy Anadarko because they have adjacent acreage.
In the last several months, Shell has held talks with Endeavor Energy Resources, the largest privately owned company in the Permian. Endeavor might be valued at $10 billion to $15 billion, bankers say.
Blas, Gilblom and Casey write for Bloomberg. The Associated Press was used in compiling this report.
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