The Battle For Anadarko: Will Chevron Outbid Occidental?

Chevron Corporation (NYSE:CVX) and Occidental Petroleum Corporation (NYSE:OXY) are locked in a titanic battle over oil and gas producer Anadarko Petroleum Corporation (NYSE:APC) . At stake is Anadarko’s 250,000 net acres in the fastest growing oil producing region in the world - the Permian basin spread over west Texas and New Mexico.

The Story So Far

Chevron Announces It's Buying Anadarko: On Apr 12, America’s No. 2 energy producer, Chevron announced a roughly $50 billion deal to buy Texas-based upstream company, Anadarko. The acquisition will give it access to potentially lucrative Permian Basin acreage, LNG operations in Mozambique, as well as attractive deepwater areas in the Gulf of Mexico.

The buyout was touted as the eleventh largest corporate deal ever involving an energy and power company and is the largest since Royal Dutch Shell (LON:RDSa)'s RDS.A acquisition of BG Group plc in 2016. The agreement is subject to Anadarko stockholder approval and regulatory clearance and is expected to close in the second half of 2019.

Anadarko's shares soared more than 32% following the proposal.

A Look at the Transaction: Under the terms of the agreement, Anadarko shareholders will receive $16.25 in cash and 0.3869 shares of Chevron for each Anadarko share they own. This combination of cash and stock values Anadarko shares at $65 apiece, a 37% premium to the pre-announcement closing price.

The cash component of the deal is worth about $8 billion, while the equity contribution will be obtained through the issuance of approximately 200 million in Chevron shares. The headline price of $50 billion includes the assumption of $15 billion of Anadarko’s debt.

Rumors Surface About Occidental's Interest: Meanwhile, word broke out that Occidental had been working to buy Anadarko since late March and reportedly bid as much as $75 a share for the company (more than Chevron's $65 and with a higher cash component).

The motive was the same - become the largest crude producer the Permian Basin, where Occidental owns the most acreage (around 2.5 million acres) followed by Chevron (2.2 million acres).

Widely regarded as the dominant domestic growth area for onshore oil output, the ‘super’ basin is currently producing just above 4 million barrels daily (almost double that of two years ago) and is expected to churn out another 1 million barrels per day by early 2020 – more than any OPEC country other than Saudi Arabia. Importantly, experts say that it’s cheaper to drill and complete oil wells in the Permian Basin – at around $35-$40 per barrel – as compared to most other major fields.

Occidental ‘Officially’ Tops Chevron's Bid: On Apr 24, Occidental officially tendered its offer for the purchase of Anadarko. It offered to purchase the upstream operator at a price of $76 per share ($38 in cash and 0.6094 of its shares for each share of Anadarko), or roughly $57 billion (including debt), which is a 16.9% increase from Chevron’s $65 a share deal. Moreover, Occidental is offering 50% in cash and 50% in shares compared to Chevron 25% cash and 75% shares offer.

In order to finance such a massive acquisition (compared to its own scale and size), Occidental has agreed to sell Anadarko's African assets to French supermajor TOTAL SA (NYSE:TOT) for $8.8 billion once the transaction is complete. The company also brokered a deal with Berkshire Hathaway BRK.B wherein Warren Buffet's firm will invest $10 billion into Occidental preferred shares.

Anadarko shares gained a further 12% to $71.40 (again, more than Chevron's $65 offer) after Occidental's public bid to log a total return in excess of 50% since Chevron's announcement.

Anadarko Deem Occidental Bid as 'Superior': On May 6, Anadarko's board declared Occidental’s $38 billion takeover offer as superior to the one it earlier accepted from Chevron.

What Happens Next?

Anadarko’s acceptance of Occidental’s bid has thrown down the gauntlet to San Ramon, CA-based Chevron to come up with a better offer. Conversely, it can walk away with a billion dollar in breakup fee.

Analysts and industry watchers are expecting a higher counter bid from Chevron considering that Zacks Rank #1 (Strong Buy) Anadarko preferred the supermajor's lower bid initially even when Occidental was ready to shell out up to $75 per share.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Also, while Occidental claims that proposed deal will be highly accretive to cash flows based on potential annual synergies to the tune of $3.5 billion, the company has come under fire from certain quarters for paying an 'expensive' price. As it is, Occidental faces hurdles to sell the deal to its own shareholders amid increasing backlash over the high payoff to Berkshire.

Chevron, which has until Friday to respond, no doubt has the financial muscle to indulge into a costly bidding war. It’s also no secret that the company would love to get Anadarko’s attractive worldwide assets, especially the promise of becoming top acreage holder in the booming Permian basin. At the same time, it seems highly unlikely that Chevron would a make counter offer ‘well above’ Occidental’s.

Instead, Chevron might just find strategic rationale in upping its bid a little bit to match/slightly exceed Occidental’s offer and see what happens. Thereafter, it might just decide to pocket the $1 billion breakup fee and abandon its bid to acquire Anadarko.

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