Less than two weeks ago Chevron announced a deal to buy Anadarko Petroleum for $33 billion plus assuming outstanding debt, a deal worth $50 billion (see Permian Love Story: Chevron Buying Anadarko in $50B Megamerger). At the time we told you about a potential cloud on the horizon–that Occidental Petroleum had offered more for Anadarko. Indeed, Oxy wants Anadarko too, and a full-blown bidding war has now erupted. Yesterday Oxy made it’s offer public, an offer 14% higher than Chevron’s offer: $57 billion.
This story is getting interesting. As we pointed out in our earlier story about Chevron’s bid, it’s all about the oily Permian. Most analysts (including CNBC’s Jim Cramer) believe Chevron will be the ultimate victor. However, Chevron may have to increase it’s offer before it’s done.
However, the story is more complicated than which company ends up offering the most money overall.
The day before the Chevron announcement, Anadarko’s CEO and top management changed their compensation package so they’ll get a $22 million golden parachute, to be funded by Chevron. Which may explain why Anadarko ultimately chose Chevron’s deal over Oxy’s deal, even though Oxy’s deal was/is for more money. Anadarko’s golden parachute action raises all sorts of red flags about conflicts of interest and whether or not that $22 million should be going to Anadarko shareholders instead of padding the bank accounts of senior managers.
Now that the Oxy offer is out in the open and official, Anadarko has to at least pay lip service to considering the offer, which they did in this brief announcement:
Anadarko Petroleum Corporation (NYSE: APC) today confirmed that it has received an unsolicited proposal from Occidental Petroleum Corporation (NYSE: OXY) on April 24, 2019 under which Anadarko shareholders would receive $38.00 in cash and 0.6094 shares of Occidental common stock for each share of Anadarko common stock.
As previously announced on April 12, 2019, following unanimous approval from the Company’s board of directors, Anadarko entered into a definitive agreement (the “Chevron Merger Agreement”) with Chevron Corporation (NYSE: CVX) under which a wholly owned subsidiary of Chevron would acquire all of the outstanding shares of Anadarko in a stock and cash transaction valued at $33 billion, or $65 per share.
In accordance with the terms of the Chevron Merger Agreement, and in consultation with its financial and legal advisors, Anadarko’s board of directors will carefully review Occidental’s proposal to determine the course of action that it believes is in the best interest of the Company’s stockholders. The Anadarko board has not made any determination as to whether Occidental’s proposal constitutes, or could reasonably be expected to result in, a superior proposal under the terms of the Chevron Merger Agreement. The Anadarko board expects to respond to Occidental’s proposal upon completing its review, and accordingly reaffirms its existing recommendation of the transaction with Chevron at this time.
Anadarko stockholders are advised to take no action at this time. (1)
The news of the offer, outlining some of the details, from David Blackmon (Forbes website):
In a surprising move, Occidential Petroleum (OXY) announced Wednesday morning that it was tendering an offer to the board of directors at Anadarko Petroleum APC that OXY describes as being “superior” to the already-accepted offer by Chevron , which was announced two weeks ago. News reports at that time indicated that OXY had in fact offered a higher price for Anadarko – $70 per share – but Anadarko had decided to accept the Chevron offer due to “structural issues with the Occidental bid.”
Unwilling to accept that fate, OXY has now come back with an offer of $76 per share, in which shareholders of Anadarko stock “would receive $38.00 in cash and 0.6094 shares of Occidental common stock for each share of Anadarko common stock.” OXY pegs the total value of this new offer at $57 billion.
This compares to the already-accepted $50 billion Chevron offer that values Anadarko stock at $65 per share, from which shareholders would receive $16.25 in cash and .3869 shares of Chevron for every share of Anadarko stock they own. When markets opened Wednesday morning, OXY was trading at $60.31 and Chevron at $120.45.
Any way you look at it, shareholders would derive a higher initial return from the OXY offer than they would from the Chevron deal. When the original deal was announced two weeks ago, Anadarko’s board was not specific about nature of the “structural issues” with OXY’s original offer that had caused them to reject it. Assuming OXY has dealt with those issues in the scope of this new, even higher offer, it seems to place the Anadarko board in a real quandary.
“We have been focused on Anadarko for several years because we have long believed that we are ideally positioned to generate compelling value from a combination with them. We look forward to engaging immediately with Anadarko’s Board and stakeholders to deliver this superior transaction,” OXY CEO Vicki Hollub said in the company’s April 24 press statement.
OXY has long been a leading oil producer in the Permian Basin, and says the acquisition of Anadarko would increase its production in that basin to 533,000 barrels of oil equivalent (BOE) per day. The company’s press statement goes on to note that an acquisition of Anadarko would raise OXY’s total enterprise value to over $100 billion and result in a company with total global production of 1.4 million BOE per day.
Shares of Anadarko rose about 11% in pre-market trading, as investors anticipate OXY’s new offer will re-open the bidding for the company. Chevron’s management had not responded as of this writing, but there can be little doubt that OXY’s gambit will result in responses from both Chevron and Anadarko before the day is out.
As is always the case, the only certain aspect of the oil and gas industry is that, in the end, nothing is really certain.
Stay tuned. (2)
We liked the following analysis from hedge fund manager Josh Young, writing on the Seeking Alpha investors website:
The Wall Street Journal just reported that Anadarko’s (APC) CEO and top management changed their pay agreements the day before announcing a merger with Chevron (CVX). Reportedly, they will make an additional $22 million plus tax benefits worth millions more due to the changes. This could be the key to understanding why Anadarko actually took a reportedly lower bid from Chevron than the higher bid it reportedly received from Occidental Petroleum (NYSE:OXY).
Here is Anadarko’s share price performance since CEO Al Walker joined in 2012:
And his reported total compensation at that time? Nearly $127 million. Not a bad gig if you can get it.
The WSJ mentions select competitors who outperformed Anadarko during that time frame. Here is a chart of Anadarko’s performance vs. those competitors: EOG (EOG), Pioneer (PXD) and Concho (CXO):
However, a more relevant peer set isn’t cherry-picked competitors, it is the index (XOP), the buyer of Anadarko – Chevron, the reported high bidder for Anadarko – Occidental Petroleum, and two companies with the most similar asset bases – Noble (NBL) and Apache (APA):
Compared to this set of more reasonable comps, including the upstream index XOP, bidders on Anadarko and companies with similar asset mixes in 2012 like Apache and Noble, Anadarko did outperform meaningfully, roughly flat versus the index down 33%, and everyone but Chevron down more than APC.
However, despite outperformance versus relevant competitors, it is still questionable to change payouts the day before announcing a deal. It raises very serious questions about principal/agent conflicts, as perhaps that extra $22+ million could and maybe should have gone to Anadarko’s shareholders. It is also a possible explanation for why Chevron’s bid was preferred over Oxy’s higher bid: perhaps Oxy was unwilling to fund an extra cash-out by senior management. (3)
So, now the fun begins. No doubt Anadarko’s golden parachute deal will come under close scrutiny. And we suspect lawyers and lawsuits will be involved, no matter which offer Anadarko ultimately selects.
(1) Anadarko Petroleum Corporation (Apr 24, 2019) – Anadarko Confirms Receipt Of Unsolicited Proposal From Occidental
(2) Forbes/David Blackmon (Apr 24, 2019) – Occidental’s Bombshell Ups The Ante For Anadarko
(3) Seeking Alpha/Josh Young (Apr 24, 2019) – Anadarko Executive Cash-Out – The Key To Preferring Chevron To Occidental?
Below is a copy of the press release issued by Oxy yesterday, which includes a copy of Oxy’s letter sent to Anadarko:
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