Anadarko battle heats up
Occidental’s hostile counter-bid throws a potential spanner in Chevron’s big Permian bet
It was not meant to be like this. When Chevron announced its $65/share, $50bn swoop on US independent Anadarko, most observers were congratulating the major on a good fit at an excellent price, while turning their attention to what Chevron's bold move meant for the remainder of its peer group.
But another potential Anadarko suitor, its fellow US independent Occidental, is keen to spoil the party. On 24 April, its CEO Vicki Hollub sent a letter to the Anadarko board making public three previous bids and outlining another offer.
Occidental's 50pc in cash, 50pc in shares deal values Anadarko at $76/share for an overall value of $57bn. But it is not as simple as Occidental's higher bid trumping Chevron, or indeed the major having to up its offer all the way to matching its rival.
More than just cash
Hollub's letter made clear that all three of its previous bids were higher than the $65/share Anadarko accepted from Chevron, and that its quarry's board did not even respond to offers on 8 and 11 April, the second of which upped the price to $76/share (although only 40pc in cash) the day before Anadarko accepted Chevron's bid.
"It is pretty evident that the Anadarko board prefers to hold Chevron paper," says Blake Fernandez, senior research analyst for integrated oils and refiners at Houston-based investment bank Simmons. In other words, given the share components of both offers, those not looking to sell immediately think Chevron is a better bet.
"Long-term, Chevron looks better placed to add more value," says Fernandez. "If I am a long-term shareholder, I would probably prefer Chevron paper."
Chevron will not necessarily escape making some efforts to sweeten the deal for the broader Anadarko shareholder base, a portion of which might be tempted to take Occidental's cash and dump their shares. If so, Fernandez is unconcerned.
"According to Chevron's CFO, even after the deal [on its initial terms], its debt-to-capital ratio would be around 25pc, which is very manageable," he says. And the economics of the deal are on the basis of $60/bl Brent, whereas oil prices are currently well above $70/bl. Chevron is generating a lot of free cashflow that could be used to deleverage quickly, even if the cash element of the transaction was increased, says Fernandez.
"Chevron has one of the stronger balance sheets of its peers, comparable to Total's and much stronger than BP's or Shell's," agrees Stuart Joyner, an analyst at London-based research firm Redburn. "At pre-deal share prices, only a quarter [of the current Chevron offer] is in cash, which is quite a small component."
Should Chevron have to up its cash offer, the Occidental counter-proposal points to an obvious area where this additional outlay could be recouped. Despite having a main overlap with Anadarko only in the Permian and virtually no synergies in other areas such the Gulf of Mexico and global LNG, Occidental promises $2bn/yr in cost savings, compared to just $1bn/yr highlighted by Chevron.
"Feedback from investors was that the $1bn/yr figure looked very conservative," says Fernandez. "Chevron should have more fat to cut [compared to an Occidental tie-up]. It gives an opportunity to make more savings if it needs to up its offer."
Mozambique, where Anadarko is the operator in Offshore Area 1 and a major stakeholder in the Mozambique LNG project, is another example where Chevron can provide an edge beyond simply Occidental's willingness to pay more. Whereas Anadarko was looking at one of the sector's largest ever project financing deals to fund the project, Chevron's much stronger balance sheet should give it better and cheaper financing options.
In contrast, the expectation is that Occidental may have to sell off Anadarko's stake in the project to help make its economics work. With a fairly limited pool of potential buyers within those active in global LNG, and Occidental clearly a very willing seller, it is hard to envisage it getting a premium price.
The Permian Basin is clearly a key driver of the deal for Chevron, as well as being virtually all of the logic for an Occidental deal. In the Delaware Basin, in particular, "our combined acreage creates an unmatched position in the core of the core. It results in a 75-mile wide highly contiguous corridor, where we can drill, develop, operate and build infrastructure, all with great efficiency," Mike Wirth, Chevron's chairman and CEO, said on an analyst call after the deal was announced.
"That strategic overlap between portfolios is what you are looking for when you are putting a deal together in the Permian," says Joyner. "We have seen it not just with the majors but with some of the M&A activity between the independents too."
Fernandez also appreciates the fit of the two portfolios. "One of the issues with an acquisition is that you get cats and dogs, and it can be a real pain to have to divest a bunch of assets you do not want," he says. "The geographical and operational overlap between Chevron and Anadarko is a natural fit; investors think that it makes a lot of sense. Chevron been looking at [Anadarko] for years."
Echoing those views, "for older guys like me … I would say, what took you so long?", asked Doug Leggate, managing director, head of US oil and gas at Bank of America Merrill Lynch, in one of the analyst call's lighter moments.
One question, should Chevron see off its rival, is whether it risks becoming too exposed to the Permian. Even before the deal, appetite for growth there was a clear message at Chevron's capital market day (CMD) in March, where it said it was aiming for 900,000bl/d of Permian production by 2023. At its March CMD, ExxonMobil targeted 1mn bl/d.
For Chevron, post-deal, the share of Permian production in their overall portfolio could go through the 25pc mark. "That is significant exposure to a particular country and geology. I am quite surprised there is not more investor caution, but they seem willing to absorb that risk," says Fernandez.
Nor is he alone. "How big are you comfortable with the Permian becoming as a percentage of your overall portfolio?" asked Jason Gammel, senior oil analyst at investment back Jefferies, on Chevron's analyst call.
In his reply, Wirth seemed relatively unconcerned. "It is low-risk below ground, it is lower risk above ground than about anywhere else in the world and it is high return. And so, having a great position in a low-risk, high-return basin that is short-cycle is a really attractive thing," the Chevron chief said.
Redburn shares his confidence. "We are quite bullish on shale," says Joyner. "There is not really a risk of being over-exposed-Chevron has been quite successful so far.
"We are happy to see them bulking up in the Permian, it is an important component of the portfolio. The lion's share of global growth is coming from US shale, the Permian in particular. Chevron is just following the trend," he continues.
It is "empirical", in Joyner's view, that Chevron has achieved better well productivity in the Permian than Anadarko. "We have seen very good progress so far, for a number of reasons. Chevron has the overall bench capacity to do these types of big capital projects better than an independent E&P company.
"It also has more of a focus on long-term net asset value accretion, rather than quarter-to-quarter. It can leverage big data and greater access to technology, and has a willingness to try new technology. Across their bigger portfolios, majors can actually be more entrepreneurial, which is a reversal of the initial shale trend," says Joyner, citing also the success of ExxonMobil and BP's ambitious targets as it assumes full control of its BHP Billiton-acquired assets.
This chimes with Chevron's own message. It plans to "leverage Chevron's digital tools and suite of technologies to improve recovery, lower cost and increase efficiencies" and cites "continued improvement in pad scale development, and improved performance from all development attributes, drilling, completions, recoveries and the efficiency of our infrastructure build out".
That said, Anadarko's Permian position is largely a joint venture with Shell, the firm's focus has been drilling as many wells as possible as establish operatorship and has thus not really been in development mode. In short, Chevron is a long way from having a monopoly on being able to add more value from Anadarko's current Permian operations. There are certainly those that argue Occidental is at least as good, if not better, an operator in the Permian than Chevron.
No Moz worries?
One area in which Joyner and Fernandez are in full agreement is that, despite the Mozambique government making some rather ominous noises about a full anti-trust review, the smart money is on a possible Chevron entrance into the country being relatively painless.
When Thailand's PTTEP acquired US independent Cove Energy, which held a Mozambique position, there were some issues, particularly around capital gains tax, although this was eventually resolved. And, for Joyner, what trumps any fear of a repeat is that Chevron is already a major global LNG player. "For Mozambique to have [Chevron] come in is a good position for them, relative to other LNG projects in Africa or elsewhere. It is worth having them on the team," he says.
"Why would you not want Chevron involved in the project?" agrees Fernandez. "It brings expertise, it can add value. It is very reasonable that you would want a player like that coming in."
Redburn expects Mozambique LNG to take a final investment decision (FID) late in 2019, and, at a crucial stage, delays from an over-zealous approvals process would do no-one any favours. "There are lots of LNG projects competing for FID and timing is everything. If the project is ready to go, I would imagine everyone will be pretty keen to get it over the line," Joyner predicts.
Following the template
Assuming its deal completes, Chevron will move its existing $5bn+ target for divestments forward by a year to be completed by the end of 2019-and announced a new target of $15-$20bn of asset disposals for 2020-22-as it further high-grades its portfolio. In this, it is "following the template" of other recent large deals done by the majors which are at least partly "funded by asset churn", says Joyner.
But, if all the majors are looking to sell off what Chevron describes as "assets others will value and would be prepared to invest in, that might be lower in our investment queue", it begs the question around sufficient buyer appetite for these unloved assets. Peers such as BP and Total already look to be falling behind on their divestment schedules.
Joyner is relatively sanguine. Taking BP's plan to sell its non-core US shale business in the San Juan basin as an example, "it is in discussions, but these things can be lumpy," he says. "It is looking at how best to structure it, whether to sell it in tranches or as a whole package. The market does not care too much. For the market, price is more of a driver than timing."
Chevron's peers will be watching its progress closely. If it gets the deal over the line, it moves the firm very firmly away from Total and into the company of ExxonMobil, Shell and BP in production terms. And, clearly, its position in the Permian will be strengthened.
Shell has "quite a big US shale footprint already", says Joyner, but, relative to its overall size, it is small compared to ExxonMobil or Chevron. Moreover, while its 2015 BG deal boosted its production in one fell swoop, beyond that its production profile is flat to gradually declining.
The firm might argue that is not a problem as it is chasing value, not volume, says Joyner, but feels it may be under some pressure to make an acquisition, and the US offers the widest range of targets.
Given its Permian joint venture, Shell is, ironically, another natural buyer of Anadarko, says Fernandez. But its CEO has promised not to raise spending above $30bn, including M&A, putting any deal well out of its price range.
Listening to Shell executives at industry events, though, Fernandez thinks it is trying to send a message to the Street, positioning investors to expect a deal. It has been linked with Permian shale player Endeavour Energy, with a $8-10bn price tag. If it paid only 50pc in cash, and assuming $25bn in capex, it could do that deal and still keep below its $30bn target, Fernandez notes.
Despite a post-Anadarko Chevron's production moving decisively ahead of it, Total does not "have to do something", in Joyner's view. "It has been very acquisitive and has done a good job; e.g. with [Denmark's] Maersk, it created quite a lot of value through inorganic growth. It is growing at 9pc p.a., M&A is not an immediate requirement," he says.
But, on a longer-term view, shale is "going from strength to strength; by our models, the US in the early 2020s will be producing double that of Saudi Arabia", says Joyner. "Total looks under-weight in the US, and in shale in particular".
US shale is "a gaping hole" in Total's portfolio, according to Fernandez, also identifying Norway's Equinor as another European producer which may need to build on its current limited exposure.
"With Total, the issue it is going to have is expertise," Fernandez warns. "It does not have an existing platform. Shell can do a bolt-on, but Total is basically starting from scratch. Naturally that leads you towards a big corporate transaction. They cannot just buy acreage, they need to get a team with expertise."
Some have suggested that Occidental's move is defensive, an attempt to bulk up rather being swallowed itself. Should it fail, it is not beyond the bounds of possibility that it could be the next US independent to move into a major's crosshairs.