Published: Tue, April 16, 2019
Markets | By Erika Turner

The Aquisition of Anadarko Makes Chevron a Fossil-Fuel Ultramajor

The Aquisition of Anadarko Makes Chevron a Fossil-Fuel Ultramajor

Chevron, which already has 2.3mn acres in the Permian Basin, said the Anadarko deal would give the combined company a 75-mile (120-km)-wide corridor across the Permian's DE basin, on the Texas-New Mexico border.

BP Plc and Royal Dutch Shell Plc, which lag peers like Exxon and Chevron in the Permian, could make acquisitions to gain more exposure to the formation, analysts said. The deal comes as oil majors like Exxon Mobil look to carve out a dominant position in the Permian basin, the largest US shale field and the driver of a boom in American oil production.

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. It also expands its oil and gas operations in the Gulf of Mexico and in liquefied natural gas.

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. It also plans to sell assets worth up to $20 billion between 2020 and 2022, the company said.

The transaction, which has been approved by the boards of directors of both companies, is expected to close in the second half of the year. The oil and gas development company reported $0.38 earnings per share (EPS) for the quarter, missing the consensus estimate of $0.57 by ($0.19).

"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".

Chevron said the combined entity would have had daily output of 3.596 million barrels equivalent of oil a year ago, compared with Shell's 3.666 million.

Like other USA 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. Capital One Financial cut shares of Anadarko Petroleum from an "overweight" rating to an "equal weight" rating in a research report on Thursday, December 20th.

Saudi Oil Cuts Deeper than Promised
The producer group's supply cuts have been aimed largely at offsetting record crude production out of the United States. The price difference between WTI and Brent oil narrowed to $8.86 per barrel on average in March, according to the IEA.

"It will be a continuous shift toward larger companies in basically all segments of the shale industry", said Artem Abramov, head of shale research for Rystad Energy.

Shares of Anadarko jumped 33% Friday, while Chevron's stock fell 5%.

Under the terms of the agreement, Anadarko shareholders will receive 0.3869 Chevron shares and $16.25 in cash for each of their shares. Many investors now say Chevron's deal will embolden them to grill companies in the sector whether it is time to throw in the towel and sell.

The last five years has seen the US double its domestic oil production and become a rival to Saudi Arabia and Russian Federation as the world's premier supplier.

Producers in the Permian basin pump around 4 million barrels per day (mbd) and IHS Markit expects it to hit 5.4 mbd in 2023, more than the total production of any OPEC country other than Saudi Arabia. DNB Asset Management AS increased its stake in Anadarko Petroleum by 15.0% during the 1st quarter.

Phil Flynn, senior market analyst with the PRICE futures group, said it's clear Chevron is investing in the shale revolution.

-Credit Suisse Group AG was financial adviser to Chevron while Paul, Weiss, Rifkind, Wharton & Garrison LLP was legal adviser. "Executing it well is important, so that will be our focus", said Wirth. Anadarko was advised by Evercore and Goldman Sachs.

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