Chevron Corp.’s takeover of Anadarko Petroleum Corp. is likely to “shake up the U.S. upstream sector” and create an operator that domestically would rival ExxonMobil Corp., analysts said Friday.
The combined portfolios of Chevron and Anadarko would create the leading U.S. producer, with forecast production of more than 1.6 million boe/d, according to GlobalData.
“The deal is the largest acquisition by a supermajor since Royal Dutch Shell plc acquired BG Group for $53 billion in 2015,” GlobalData upstream analyst Jonathan Markham said.
In addition to revamping the U.S. exploration and production (E&P) sector, the merger “will also create opportunities in the international space, with Chevron targeting $15-20 billion of divestments in the next four years. Key deals could include Chevron’s assets in the UK, Denmark, Thailand, Indonesia, Nigeria and Angola, as well as Anadarko’s operations in Algeria and Ghana.”
The acquisition is a continuation of Chevron’s recent focus on upstream operations in the United States, Markham noted.
“Major contributors will be shale plays and deep/ultra-deepwater fields. Chevron is expected to become the single largest producer in the U.S. in both these areas, where we have forecast that production will be over 1.1 million boe/d from shale and nearly 0.35 million boe/d from deep/ultra-deepwater in 2019.”
Chevron’s Permian position would provide more than half of the total Lower 48 output, with the Denver-Julesburg Basin providing another 25% of domestic onshore production, according to GlobalData.
“Potential mergers and acquisitions were a frequently discussed topic during fourth quarter 2018 conference calls, and it'll be interesting to see whether this sets off a wave of merger activity among other U.S. producers,” said NGI’s Patrick Rau, director of strategy and research.
“Chevron and Anadarko are both large-cap producers with international E&P holdings and LNG interests, so their reasons to combine are driven by more than just trying to achieve better scale for their U.S. operations.
“But such scale matters, and small- to mid-cap U.S. producers may struggle to achieve that relative to their larger peers in this new 'lower-for-longer' price environment. Improved efficiencies are particularly important these days, now that E&P companies are being much more heavily scrutinized by investors who want them to increase their returns on invested capital.”
Wood Mackenzie senior analyst Roy Martin said Chevron would “join the ranks of the ultra majors, and the Big Three becomes the Big Four.” Chevron would be the No. 2 ultra major after ExxonMobil, followed by Shell and BP plc.
“The acquisition makes the majors’ peer group much more polarized,” Martin said. “ExxonMobil, Chevron, Shell and BP are now in a league of their own. The deal plays to Chevron’s strengths, which are tight oil and LNG. On top of this, it diversifies their growth options, while also giving them more in tight oil.”
By expanding its Permian Delaware position, Chevron “ought to be able to do more with the acreage than Anadarko, which lagged behind in terms of well productivity.”
The deal will also see Chevron assert itself even more as the leader in low-royalty assets in the U.S. onshore, said Wood Mackenzie’s Robert Clarke, Lower 48 research director. “Chevron should truly outperform on cash flow and payback metrics for tight oil.”
On the gas export front, Wood Mackenzie’s Frank Harris, vice president of LNG consulting, said the deal is unlikely to have a near-term impact on whether the Anadarko-led Mozambique project is sanctioned, as a final investment decision is considered imminent. “However, Mozambique offers attractive long-term growth and diversification opportunities for Chevron's LNG portfolio,” Harris said.
Rystad Energy’s team also weighed in on the mega-deal.
"Energy giants recognize that they need to invest more in the shale sector and in renewable energy,” CEO Jarand Rystad said. “At the same time, due to the lower cost of capital prevalent today, it makes sense for modern E&P companies to favor higher leverage and lower equity share, and instead use debt capital to fund investments and operations, while enhancing shareholder value through share buy-backs and higher dividends...
“This acquisition represents a golden opportunity for Chevron to achieve a more leveraged capital structure that is better suited for the lower risk energy projects of the future."
Rystad’s head of research Per Magnus Nysveen noted that Anadarko has long been considered to have the “best positioned acreage in the sweetest spot of the Permian Delaware Basin. Combining these shale assets with Chevron’s strong legacy position in the same area, we will now see Chevron emerging as the clear leader among all Permian players, both in terms of production growth and as a cost leader."
The combined company “will be by far the largest producer in the Permian, which is the fastest growing basin in the world, well ahead of ExxonMobil,” Nysveen said. “By 2025, the merged entity will be able to produce as much 1.6 million boe/d from the Permian Basin alone."
Chevron is paying an estimated 37% premium for Anadarko, but even so, “we think the deal value price of $50 billion is surprisingly good for Chevron,” Nysveen said. “The implicit oil price in the deal is $60/bbl, while oil price today is $71/bbl. Adding synergies, we see a strong potential for value capture here.”
Tudor, Pickering, Holt & Co. Inc. analysts said more majors may jump into the M&A waters with the tie-up. Although they were “surprised by the timing” of the transaction, “we understand the unique opportunity to enhance multiple facets of the business at a discount…
Anadarko “will greatly enhance the business' opportunity set, with a contiguous 240,000 net acre position in the Permian overlapping Chevron mineral ownership, a greatly expanded Gulf of Mexico infrastructure footprint, which extends the tie-back opportunity set, and a world-scale LNG development in Mozambique that fits well in Chevron's global gas portfolio.”
Gaining Anadarko’s $8 billion ownership in midstream operator Western Gas Partners LP creates “further operational benefits as the midstream operator will be aligned with Chevron’s shale development (and potentially support much needed gas infrastructure in the Permian).”
Miller/Howard Investments suggested the likelihood was low of “another bidder” for Anadarko emerging, but it’s not zero, analysts said.
Occidental Petroleum Corp. reportedly was said to be in the hunt to buy Anadarko. CNBC reported Anadarko was offered $70/share by Occidental, but the board accepted the lower deal, which Miller/Howard analysts said could be “because it involved more cash and less stock...stay tuned on this.”