Financial analysts on Wednesday said the bidding war for Anadarko Petroleum Corp. by Chevron Corp. and Occidental Petroleum Corp. was unheard of in the exploration and production (E&P) sector.
The high stakes bidding has set up a “virtually unprecedented scenario in the E&P industry: a genuine, outright bidding war,” according to Raymond James & Associates Inc. “It is hard to recall the last time something quite like this happened.”
For context, Raymond James analyst Pavel Molchanov said none of the three E&P mega-mergers over the last 15 years involved bidding wars.
The three biggest E&P deals were between Royal Dutch Shell plc/BG Group plc for $70 billion, ExxonMobil Corp./XTO Energy Inc. for $41 billion and ConocoPhillips/Burlington Resources for $35.6 billion.
“To put the point even more strongly, Occidental is going head-to-head against a supermajor four times its size,” Molchanov said. “To the extent that there will be a ‘winner’ i.e., who will ultimately get to acquire Anadarko, we think Chevron is more likely to emerge in that position.”
Chevron may try to match or even top Oxy’s bid.
“However, needless to say this is an extremely fluid situation, and we have to be candid that any predictions are merely guesses at this point,” Molchanov said. In the near term, “this is unambiguously bad news for Oxy as a stock.
“Bearing in mind the prospect of a potentially prolonged bidding war, along with the massive equity issuance and borrowing required (relative to Oxy’s share base and balance sheet), Oxy shares will come under intense pressure; there is no sugarcoating this.”
In a strictly fundamental sense, Molchanov said the transaction could be accretive for Oxy, but even so, the news places shareholders “in a difficult position.”
Analysts with Tudor, Pickering, Holt & Co. Inc. (TPH) noted the synergies that Oxy expects to recoup from the deal, pegged at $3.5 billion overall, with $900 million from capital synergies, $1.1 billion via operating expenditures and general/administrative (G&A) costs, and $1.5 billion from reduced capital spending.
“In our view, we see Oxy’s bid as more representative of the true value for Anadarko, though we think the overall asset base is a more strategic fit with Chevron,” the TPH team said.
“We'll be watching to see if/how Chevron responds to the competing bid, along with the reaction of Anadarko shareholders as the market has been pricing in a higher offer given the $1 billion break up fee associated with the deal,” worth around $2/share for Anadarko.
“While this public release formalizes Oxy's bid for Anadarko, an asset which management has been looking at since 2017, we continue to believe there are other potential deals on the market that are smaller in nature, offer more contiguous Permian acreage to Oxy's existing position, and offer similar G&A synergies while generating free cash flow.”
Wood Mackenzie corporate analyst Soe Sutherland said the proposed offer “would put Occidental alongside ConocoPhillips in a peer group of two, as a super independent.” ConocoPhillips, formerly a supermajor, became the world’s largest independent after selling off its downstream operations to focus on E&P.
However, the deal is going to be a big financial stretch for Oxy, as its gearing ratio at the end of the fourth quarter was 25%. “A potential transaction would materially increase the company's leverage ratios and stretch its balance sheet,” Sutherland said.
"The deal underscores Occidental's need to scale up in the Permian Basin,” she noted. “If the deal goes through, it would give the company ‘ExxonMobil or Chevron-like’ Permian scale, and set them up to join the Million Boe/d Permian Club in the late 2020s, according to our base case.”
In addition, the deal highlights that diversity “is still valued by U.S. independents, and would mark Occidental's entry into deepwater Gulf of Mexico and LNG." Oxy’s enhanced oil recovery (EOR) skills also could unlock value, as it “has a fantastic track record for EOR, and is currently the largest carbon dioxide injector in the Permian Basin. In addition, Occidental has a track record of operating in areas of high geopolitical risk. It is less likely to divest the Algeria and Ghana components of Anadarko's portfolio."
Moody’s Investors Service said Oxy’s credit profile would suffer with the acquisition, adding almost $40 billion of debt to its capital structure. Vice President Andrew Brooks said the proposed deal “would further strengthen and diversify Oxy's upstream and midstream asset base, adding further scale to its already large acreage position in the Permian Basin.
“However, Oxy would be challenged to deliver asset sales, capital and operating cost synergies and superior execution on the acquired assets to fund debt reduction should its bid for Anadarko prove successful...While Moody's expects that Oxy would prioritize debt reduction, that effort would start from an exceedingly high level.”