World Oil Analysis: Chevron vs. Oxy: Who fits Anadarko better?

Big foot project. Photo: Chevron.

HOUSTON -- The third and latest offer (this time publicly) on Wednesday by Occidental Petroleum for Anadarko Petroleum has prompted a discussion among analysts as to whether the large independent’s assets are a better fit with Oxy or Chevron. Less than two weeks ago, Chevron announced that it had entered into a definitive agreement with Anadarko to acquire all of the latter firm’s outstanding shares in a stock-and-cash transaction valued at $33 billion, or $65/share. As of April 12, Anadarko shareholders would receive 0.3869 shares of Chevron and 416.25 in cash for each Anadarko share. Thus, the total enterprise value of the transaction stands at $50 billion. It should be noted that the Chevron deal comes with a $1 billion break-up fee.

But now comes along Oxy with a very public declaration on Wednesday that it wants to acquire Anadarko for $57 billion, which works out to $76/share. This proposal represents a premium of about 20% over the Chevron deal, which as of April 23 was valued at $63.46/share. Per Oxy’s 50-50 cash-and-stock proposal, Anadarko shareholders would receive $38 in cash and 0.6094 shares of Oxy for each share of Anadarko. It bears repeating that this is now Oxy’s third offer, and two previous offers made privately (and more quietly) since late March were also higher than Chevron’s $65/share deal. The second Oxy proposal had called for $76/share, with a 40% cash, 60% stock composition. However, both of those offers were rebuffed by Anadarko’s board in favor of the Chevron deal.

So, back to the question at hand—who is the better fit? The early consensus among analysts is that Chevron is the more natural fit. As Chevron Chairman Michael Wirth noted on April 12, “This transaction builds strength on strength for Chevron. The combination of Anadarko’s premier, high-quality assets with our advantaged portfolio strengthens our leading position in the Permian, builds on our deepwater Gulf of Mexico capabilities and will grow our LNG business (via Anadarko’s Mozambique activity).”

More specifically, as relates to shale and tight resource assets, Chevron says that its combination with Anadarko will create a 75-mi-wide corridor across the most attractive acreage in the Delaware basin, extending the firm’s position as a leading Permian producer. In the deepwater arena, Chevron says this combination will enhance its existing high-margin position in the Gulf of Mexico, where it again is a leading producer and has an extensive deepwater infrastructure. And regarding LNG, Anadarko will bolster Chevron’s goal to build its LNG business by bringing a “world-class resource base” in Mozambique. It also should be noted that Chevron will not be intimidated by taking on Anadarko’s assets in now over-regulated Colorado, since the company already has a significant presence there.

Looking at Occidental, one sees a vastly different operation than Chevron. The company has deliberately concentrated all of its U.S. activity in the Permian basin, within Texas and New Mexico. And its international activity is concentrated in a handful of countries—Colombia, plus Oman, Qatar and the UAE. Ironically, Anadarko is active in twice as many states in the U.S., plus the Gulf of Mexico, and it has operations/interests in roughly twice as many countries as Oxy, including three in South America and four in Africa.

Oxy President and CEO Vicki Hollub said on Wednesday that “Occidental is a leader in using technological innovation to create value, and we will deploy our expertise to enhance the performance and productivity of Anadarko’s assets, not only in the Permian but globally.” And yet, one has to question the “global” part of that statement. Sure, it’s easy to see in the Permian why Oxy wants to acquire Anadarko—such a transaction, according to Hollub, would create a combined company that would be the largest producer in the Permian, at 533,000 boed. Right now, looking at the comparative table (“Comparing the Anadarko suitors”) on this page that World Oil has assembled, Oxy produces 330,000 boed in the Permian, representing half of its total global output. By comparison, another 127,000 boed (4Q, 2018) from Anadarko would boost Chevron’s Permian output to close to Oxy’s level.

On a Permian acreage basis, one can see easily why Oxy would want to keep Chevron from acquiring Anadarko’s roughly 600,000 acres. Add that number to Chevron’s 2.2 MM acres, and the total swells to 2.8 MM acres, 100,000 more than the current Oxy holdings. On the other hand, if Oxy acquires Anadarko, the firm then takes a commanding acreage position in the Permian, at 3.3 MM acres.

But when one looks beyond the Permian, the case for Oxy acquiring Anadarko becomes less compelling. Going back to the Colorado situation, Oxy would have to reintroduce itself to that state and all the recent regulatory hassles that have materialized—does the company really want to take this on? Second, as regards the Gulf of Mexico, Oxy has steadfastly stayed out of the offshore sector in recent years, and the firm was very happy to rid itself of properties offshore California, when it spun off California Resources Corporation a few years back (Chevron remains one of California’s leading onshore producers). And third, Oxy would have to introduce itself to the LNG sector—come to think of it, Oxy’s press release for the latest offer to Anadarko, as well as Hollub’s comments, did not mention Mozambique once.

So, is Oxy trying to grab Anadarko mostly to bolster its position in the Permian? Perhaps. One could easily see the firm selling off the Colorado, deepwater GOM, Ghana, Mozambique and South African assets, while keeping Anadarko’s operations/interests in Colombia, Guyana, Peru and Algeria. Earlier on Wednesday, a few analysts and business media commentators wondered whether Oxy was trying to behave like a bantamweight boxer poking at a heavyweight boxing champion, merely to keep Chevron from building a stronger position in the Permian.  

We at World Oil do not necessarily subscribe to that theory. We believe that Oxy genuinely wants to acquire Anadarko for a host of good reasons better known to its own management. If the firm did not genuinely want to pick up Anadarko, it would not have launched three offers for a deal, with each one at a higher figure than the Chevron agreement. Suffice to say, Oxy’s latest offer will most likely force Chevron to come back and sweeten the pot. How this situation will sort out, only the Anadarko board knows.

In the meantime, based strictly on the merits of the assets and operations involved, and just plain common sense, we at World Oil believe that acquisition of Anadarko by Chevron is a better fit. And, we might add, it would be less disruptive to the E&P industry.

Comparing the Anadarko suitors