Another truly huge merger/buyout was announced Friday when Chevron said it is buying Anadarko Petroleum for $33 billion. When you factor in Chevron assuming Anadarko’s debt, the total deal is valued at $50 billion, a number hard to wrap your brain around. The key question for us is: What does this mean for Chevron’s drilling program in the Marcellus/Utica?
We’ll get to the question of what it may mean for the M-U in a bit. First, let’s look at the deal itself.
To put the deal in perspective, in 1998 (21 years ago) Exxon bought Mobil for $80 billion, forming what is now ExxonMobil. In 2015, Shell bought out/merged in BG Group, the former British Gas, for $69.7 billion dollars (see LNG Love Story: Shell Makes Play to Buy BG in $69.7B Megamerger).
Chevron says this deal is a good one for shareholders for three strategic reasons:
1. The Texas/New Mexico Permian basin is the #1 reason for the merger. Chevron already has 1.1 million net acres in the Permian. Anadarko has another 240,000 acres, most of it adjacent to Chevron’s acreage. And Chevron/Anadarko’s acreage is located in some of the choicest parts of the Permian. Chevron says, “The combination of the two companies will create a 75-mile-wide corridor across the most attractive acreage in the Delaware basin, extending Chevron’s leading position as a producer in the Permian.”
2. Deepwater is the second most important reason. Chevron already operates deepwater Gulf of Mexico. The deal will “extend its [Chevron’s] deepwater infrastructure network.”
3. LNG is reason number three. The deal gives Chevron “another world-class resource base in Mozambique to support growing LNG demand.”
Here’s the bombshell announcement from Friday:
Chevron Corporation (NYSE: CVX) announced today that it has entered into a definitive agreement with Anadarko Petroleum Corporation (NYSE: APC) to acquire all of the outstanding shares of Anadarko in a stock and cash transaction valued at $33 billion, or $65 per share. Based on Chevron’s closing price on April 11, 2019 and under the terms of the agreement, Anadarko shareholders will receive 0.3869 shares of Chevron and $16.25 in cash for each Anadarko share. The total enterprise value of the transaction is $50 billion.
The acquisition of Anadarko will significantly enhance Chevron’s already advantaged Upstream portfolio and further strengthen its leading positions in large, attractive shale, deepwater and natural gas resource basins. Furthermore, Western Midstream Partners, LP (NYSE: WES) is a successful midstream company whose assets are well aligned with the combined companies’ upstream positions, which should further enhance their economics and execution capabilities.
“This transaction builds strength on strength for Chevron,” said Chevron’s Chairman and CEO Michael Wirth. “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. It creates attractive growth opportunities in areas that play to Chevron’s operational strengths and underscores our commitment to short-cycle, higher-return investments.”
“This transaction will unlock significant value for shareholders, generating anticipated annual run-rate synergies of approximately $2 billion, and will be accretive to free cash flow and earnings one year after close,” Wirth concluded.
“The strategic combination of Chevron and Anadarko will form a stronger and better company with world-class assets, people and opportunities,” said Anadarko Chairman and CEO Al Walker. “I have tremendous respect for Mike and his leadership team and believe Chevron’s strategy, scale and operational capabilities will further accelerate the value of Anadarko’s assets.”
- Strong Strategic Fit: Anadarko’s assets will enhance Chevron’s portfolio across a diverse set of asset classes, including:
- Shale & Tight – The combination of the two companies will create a 75-mile-wide corridor across the most attractive acreage in the Delaware basin, extending Chevron’s leading position as a producer in the Permian.
- Deepwater – The combination will enhance Chevron’s existing high-margin position in the deepwater Gulf of Mexico(GOM), where it is already a leading producer, and extend its deepwater infrastructure network.
- LNG –Chevron will gain another world-class resource base in Mozambique to support growing LNG demand. Area 1 is a very cost-competitive and well-prepared greenfield project close to major markets.
- Significant Operating and Capital Synergies: The transaction is expected to achieve run-rate cost synergies of $1 billionbefore tax and capital spending reductions of $1 billion within a year of closing.
- Accretive to Free Cash Flow and EPS: Chevron expects the transaction to be accretive to free cash flow and earnings per share one year after closing, at $60 Brent.
- Opportunity to High-Grade Portfolio: Chevron plans to divest $15 to $20 billion of assets between 2020 and 2022. The proceeds will be used to further reduce debt and return additional cash to shareholders.
- Increased Shareholder Returns: As a result of higher expected free cash flow, Chevron plans to increase its share repurchase rate from $4 billion to $5 billion per year upon closing the transaction.
The acquisition consideration is structured as 75 percent stock and 25 percent cash, providing an overall value of $65 per share based on the closing price of Chevron stock on April 11, 2019. In aggregate, upon closing of the transaction, Chevron will issue approximately 200 million shares of stock and pay approximately $8 billion in cash. Chevron will also assume estimated net debt of $15 billion. Total enterprise value of $50 billion includes the assumption of net debt and book value of non-controlling interest.
The transaction has been approved by the Boards of Directors of both companies and is expected to close in the second half of the year. The acquisition is subject to Anadarko shareholder approval. It is also subject to regulatory approvals and other customary closing conditions.
Upon closing, the Company will continue be led by Michael Wirth as Chairman and CEO. Chevron will remain headquartered in San Ramon, California.
Credit Suisse Securities (USA) LLC is acting as financial advisor to Chevron. Paul, Weiss, Rifkind, Wharton & Garrison LLP is acting as legal advisor to Chevron. Evercore and Goldman Sachs & Co. LLC are acting as financial advisors to Anadarko. Wachtell, Lipton, Rosen & Katz and Vinson & Elkins LLP are acting as legal advisors to Anadarko. (1)
Here’s the AP story that news outlets across the country are running:
Chevron will buy Anadarko Petroleum for $33 billion in a cash-and-stock, energizing its deep water exploration in the gulf and in the energy-rich southwest region of Texas called the Permian Basin.
The deal announced Friday comes with U.S. crude prices up 40% this year and vaults Chevron into a new league.
While the combined company will remain far behind Exxon Mobil Corp. and Royal Dutch Shell Plc. in market capitalization, it jumps from the fourth biggest producer among major drillers, to second, according to Wood Mackenzie.
“Chevron now joins the ranks of the UltraMajors – and the big three becomes the big four,” wrote Roy Martin, senior analyst at Wood Mackenzie, referring to Exxon, Shell and BP.
With the acquisition, Chevron gets access to Anadarko’s liquid natural gas operations in Mozambique. The combined company will also control a 75-mile-wide corridor across the Delaware Basin, just beside the Permian Basin, a region bountiful with natural gas that has been exploited through shale drilling.
There has been some pressure in energy markets as OPEC tries to push prices higher through production cuts.
When the organization of oil-producing states released its monthly report this week, it revealed that energy output from OPEC had declined to levels not seen since early 2015.
That is largely being driven by the energy powerhouse Saudi Arabia, which last month removed another 324,000 barrels of oil per day from the market.
Still, U.S. crude was selling for less than $65 per barrel Friday. That’s far from levels well above $100 per barrel reached just before the economic downturn in 2008, and there are signals that global economic growth is slowing.
The acquisition of Anadarko could give Chevron a little more breathing room when crude prices do fall.
With savings the companies plan to book and rising cash flow, Chevron said Friday that it will bump up annual stock buybacks to $5 billion, from $4 billion a year, once the transaction is complete.
Chevron plans to divest $15 billion to $20 billion in assets between 2020 and 2022, with proceeds used to lower debt and to return additional cash to shareholders, the company said.
“This transaction builds strength on strength for Chevron,” said Chairman and CEO Michael Wirth. “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.”
Anadarko shareholders will receive 0.3869 shares of Chevron and $16.25 in cash for each share they own, or $65 per share. Chevron will issue about 200 million shares and pay approximately $8 billion in cash. It will also assume about $15 billion in debt.
Chevron Corp. will keep its headquarters in San Ramon, California. Anadarko Petroleum Corp. is based in The Woodlands, Texas.
The deal is expected to close in the second half of the year. It still needs approval from shareholders of Anadarko Petroleum Corp. and regulators.
Shares of Anadarko jumped 32% at the opening bell Friday, while Chevron’s stock fell 5.3%. (2)
We spotted an excellent article on (believe it or not) CNBC, which seeks to answer the question of why Chevron is buying Anadarko:
To understand why Chevron struck the biggest oil and gas deal in years to purchase Anadarko Petroleum, you should probably pull out a globe.
Start in Texas, where Chevron will expand its presence in the top U.S. shale field. Then trace a line to the Gulf of Mexico, where the energy giant will grow its offshore drilling operations. Next, skip across the Atlantic to southern Africa, where Chevron will acquire a massive natural gas export project that’s currently under development.
The $33 billion blockbuster acquisition — $50 billion including debt — ranks as the sixth-largest oil and gas deal on the books, according to Drillinginfo and Dealogic. It’s the largest deal since 2015, when Royal Dutch Shell bought British energy giant BG Group for $82 billion in enterprise value.
Here’s why Chevron thinks Anadarko is worth the record-setting price tag.
Deal helps Chevron transform shale drilling
Shale drilling, or extracting oil and gas from rock formations, is fueling a boom in U.S. production. Small, independent drillers pioneered U.S. shale production, but the new rule is “the shale game is a scale game,” according to Chevron CEO Michael Wirth.
Now that the industry has refined technologies such as hydraulic fracturing and horizontal drilling, the next frontier is industrializing the shale process. That’s where companies such as Chevron come in.
Oil majors have the scale and financial wherewithal to essentially turn shale fields into factories. They do that by stringing together large parcels of continuous acreage, which allows them to do highly efficient pad drilling on a massive scale. Pad drilling involves drilling multiple horizontal wells from a single location.
Chevron says it can produce oil and gas from a one-square-mile area from a single drilling pad. On Friday, Chevron highlighted that the Anadarko deal creates a 75-mile-wide corridor in the Delaware Basin portion of the larger Permian Basin, the biggest U.S. shale field.
The acquisition allows Chevron to expand its Permian acreage
The 2014-2016 oil price crash sparked a land rush in the Permian, where drillers can produce crude at low breakeven costs compared with other regions. With the best land spoken for, energy companies are now turning to mergers and acquisitions to enhance their positions in the region underlying western Texas and eastern New Mexico.
That’s illustrated in the Chevron-Anadarko deal, which connects a large patch of Chevron’s Permian acreage in Culberson County, Texas, with Anadarko’s holdings in neighboring Reeves and Loving counties. Wirth says Chevron plans to add more rigs, expand pad drilling and introduce his company’s digital analysis to the Anadarko-held land.
“Clearly, a large driver of the deal is Anadarko’s prized position in the Delaware Basin where Chevron increases its position by 240,000 net acres to over 1,400,000 net acres,” said Andrew Dittmar, a mergers and acquisitions analyst at Drillinginfo. “The Delaware Basin currently provides the best well economics of any shale play in the country.”
According to sources, Occidental Petroleum also sought to snap up Anadarko. Occidental operates around the world, but its U.S. operations are focused on the Permian — including in the Delaware Basin sub-region that Chevron highlighted.
The Chevron deal will likely prompt oil majors to consider purchases of Permian players like Pioneer Natural Resources, EOG Resources and even Occidental, said Dan Eberhart, CEO at oilfield services firm Canary.
“Chevron? buying Anadarko is the first in a series of takeovers as oil companies rush to scale to make shale work,” Eberhart said in an email. “It is nearly always cheaper to drill for oil on Wall Street than in the oil patch.”
Chevron gets a foothold in Colorado’s DJ Basin and beyond
Wirth also thinks Chevron can put its scale game to work in Colorado, where Anadarko has 400,00 acres of continuous acreage in the core of the DJ Basin, another major shale region.
While the market was largely focused on the Permian on Friday, the DJ Basin actually makes up a bigger part of Anadarko’s portfolio. It is Anadarko’s biggest source of natural gas sales and its second-biggest oil-producing region.
Analysts say those assets, along with acreage in other parts of the U.S., shouldn’t be overlooked.
Chevron’s “announcement to acquire [Anadarko] displays further commitment to US onshore development, adding a highly-scalable position in the Delaware but also the DJ and Powder River basins,” Justin Lepore, senior associate at RS Energy Group, said in an email.
Chevron ups its Gulf of Mexico game
Chevron currently has six deepwater hubs in the Gulf of Mexico. Once the deal closes, that number will increase to 16 facilities.
Those assets also complement each other. Chevron points out that many of the platforms are within a 30-mile radius of the two companies’ deepwater acreage. That creates an opportunity to produce offshore oil and gas by connecting fields to existing hubs, rather than investing in expensive new infrastructure.
Companies are increasingly using these so-called tiebacks to keep costs down. Wirth declined to name specific tieback opportunities, but noted that Chevron has recently made several discoveries that could be candidates.
Chevron expands its LNG portfolio
Like other oil majors, Chevron is betting big on liquefied natural gas, a form of the fuel super-chilled to liquid form for transport on tankers. The company has two massive LNG facilities in Australia and a stake in southern Africa’s Angola LNG, and it plans to develop another project in British Columbia.
The Anadarko deal will add to that position with Mozambique LNG, a project under development that will take advantage of a giant gas field off the coast of Mozambique. Anadarko is close to greenlighting the project, which has already locked up customers in some of the biggest LNG markets around the world.
“Mozambique offers attractive long-term growth and diversification opportunities for Chevron’s LNG portfolio,” said Frank Harris, vice president for LNG consulting at energy and mining research firm Wood Mackenzie.
Deal makes Chevron a midstream player
Chevron is one of the biggest integrated oil companies in the world, with operations spanning the upstream oil and gas production business and the downstream refining and chemicals segment. But the company is not a big player in the midstream business, which involves transporting and processing oil and gas.
That changes with the Anadarko deal. The acquisition will make Chevron a majority stakeholder in Western Midstream Partners, a master limited partnership that operates pipelines and other midstream infrastructure that runs from the Gulf Coast in Texas, up through Colorado and neighboring states as far north as Wyoming.
“Chevron has been noticeably absent in the midstream rush of the past couple of years. It now takes a 55% stake in Western … which goes a long way toward fixing that,” said RT Dukes, research director for Lower 48 oil and gas at Wood Mackenzie. (3)
So the deal ticks a lot of boxes for Chevron. We still maintain the primary reason for the deal is the Permian.
But there is a potential cloud on the deal. There are reports, alluded to in the article above, that Occidental Petroleum had actually offered more for Anadarko and their deal was rebuffed. Occidental is now considering its options. Will they sue to stop this deal?
Soon after the deal was announced, CNBC, citing anonymous sources, reported that Occidental Petroleum had bid $70 per share for Anadarko and that Occidental is now considering its options. The Chevron bid contains a 3 percent breakup fee, which would come to about $1 billion. (4)
What about the Marcellus/Utica?
Chevron has an up and down past in our region. In May 2013 amidst much fanfare, Chevron purchased 61 acres to build a new regional Marcellus Shale headquarters in Moon Township, PA, a suburb of Pittsburgh (see Chevron to Build New (Big) Regional HQ in Pittsburgh Suburb). The plan was to build a huge, 350,000 square foot office complex that will be home to 1,750 people. In September 2013 Chevron got the thumbs-up from Moon officials to proceed (see Chevron Wins 1st Approval for New Regional HQ Near Pittsburgh).
But by July 2014, Chevron put the project on hold (see Chevron Puts Moon Twp, PA Office Building Project on Hold). In early 2015 Chevron announced major layoffs in the Marcellus (see Chevron Laying Off 23% of their Marcellus Workforce in Pittsburgh), and then proceeded to consolidate the remaining workforce under one existing roof (see Chevron Consolidates Reduced Marcellus Workforce Under One Roof).
In July 2016, Chevron listed their 61-acre property for sale (see Chevron Selling Site Bought for Regional Marcellus HQ in Moon Twp). We don’t find any evidence it ever sold, but we’re not sure. It certainly seemed like Chevron was looking for the exit sign in the Marcellus.
But Chevron didn’t leave. In September 2017, Chevron had the fifth most permits issued in the Marcellus/Utica in southwest PA, having received a total of 603 permits total–9 in the previous 12 months (see Top 10 Drillers in SWPA, by Number of Permits Issued). So, they operate a number of wells, and they still (at that point) were doing some drilling.
Our own Marcellus & Utica Shale Almanac 2018, which shows data through 2017, showed that Chevron was operating 336 producing wells in 2017. Anadarko Petroleum also owns wells and does drilling in PA, mostly in Lycoming County (Williamsport area). In 2017 Anadarko operated 322 producing wells in PA. Which means with this deal Chevron will roughly double the number of operating shale wells they own in PA.
Chevron’s press release about the Anadarko deal makes no mention of the Marcellus/Utica nor Chevron’s assets in the region. We have no reason to believe Chevron is leaving PA following the merger. If anything, they will have more of a presence because of Anadarko’s wells. Perhaps this deal will encourage Chevron to do more drilling in our neck of the woods, given their new status as one of the four “ultramajors” in the world.
(1) Chevron Corporation (Apr 12, 2019) – Chevron Announces Agreement to Acquire Anadarko
(2) AP/Anchorage (AK) KTUU NBC (Apr 12, 2019) – Chevron buying Anadarko for $33B as crude prices rise
(3) CNBC (Apr 12, 2019) – Why oil giant Chevron is buying Anadarko Petroleum for $33 billion
(4) Washington (DC) Post (Apr 12, 2019) – Chevron will acquire Anadarko Petroleum in a $33 billion deal
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