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The Bidding War for Anadarko has Begun: Chevron vs. Occidental
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The bidding war for Anadarko Petroleum has begun and no one is happier than APC investors. When the news that Chevron (CVX - Free Report) agreed to acquire Anadarko for $33 billion ($65 a share cash-and-stock deal) was released on April 12th, APC shares soared over 32% in one day. Meanwhile, Occidental Petroleum (OXY - Free Report) has been reaching out to Anadarko Petroleum with merger proposals since late March, and today Occidental public made a $38 billion bid (cash-and-stock deal for $76 a share) representing a 16.9% premium over Chevron’s proposal. APC surged another 12% following this announced, for a total return of 53% over the past 9 days of trading.
APC closed today at $71.40, right between both bids. Chevron was able to lock in a break-up fee of $1 billion with Anadarko, representing about $2 per share of APC. Occidental CEO Vicki Hollub voiced frustration in a letter to Anadarko’s board, saying that Anadarko made this agreement “without even picking up the phone to speak to us after we made two proposals during the week of April 8 that were at a significantly higher value to the transaction you were apparently negotiating with Chevron.” Chevron claimed they weren’t aware of any negotiation between Occidental and Anadarko. Below are the returns for CVX (-6.2%, red), OXY (-7.7%, blue), and APC (52.5%, green) since April 11th.
The Battle for the Permian Basis
The Permian Basin is one of the most fertile oil and natural gas basins in the US and has become the most productive oil fields in the world. Production in the Permian has proliferated over the last 10 years growing from less than 1 million barrels per day (BPD) to 4.2 million BPD (34% of total US oil production), displaying a 425% increase in a decade. This production rate has just surpassed Saudi Arabia’s Ghawar oil field which produced 5 million BPD for decades but recently cut production to 3.8 million BPD.
OXY and CVX are fighting for control of the Permian Basin and Anadarko is the golden ticket. Occidental currently controls the largest portion of the Permian with Chevron as a close second. The acquisition of APC would significantly improve operations for both firms in the Permian, being one of the fastest growing geographic oil production locations in the world.
The Permian has grown to be the “crown jewel” of US oil basins because of its rewarding shale formation. The Permian has 8 distinctive rock levels compared to the 1 or 2 levels found in most other shale locations. This is advantageous because it allows producers to continue to drill in the same location over and over again using the same equipment, cutting costs and improving returns. The breakeven price for most Permian wells is about $35-$40 per barrel, meaning that oil would have to drop almost 50% for these wells to stop being profitable.
Anadarko has a very lucrative piece of land in the Permian Basin with approximately 250,000 acres in the Delaware Basin (part of the greater Permian Basin) producing 160,000 BPD and even more natural gas.
Occidental Petroleum currently controlling the most substantial portion of the Permian with 2.7 million acres and producing 368,000 BPD. This production level has grown over 25% in just one year and is expected to continue this growth. A merger with Anadarko would solidify OXY’s dominant position in the Permian, and the synergies could propel them to become one of the largest US oil and gas producers.
Chevron owns 2.2 million acres in the Permian Basin producing 159,000 BPD. The acquisition of APC would provide many synergies within the Permian because of their almost overlapping current operations. Chevron’s scale and infrastructure will allow them to leverage Anadarko’s core competencies and assets to their fullest potential, making them an ideal candidate for a merger.
The Golden Parachute
One day before Anadarko announced its deal with Chevron the board approved a $22 million increase in bonuses to its top execs in the event that they strike a deal. Anadarko CEO Al Walker was approved to receive a minimum of $43 million following an acquisition by Chevron, $6.7 million more than prior guidelines, according to Equilar.
These “golden parachutes”, as they’ve been coined, are subject to controversy. Paying substantial amounts of money to CEO’s for them to close a deal and subsequently departing doesn’t sound like the most ethical move. Especially when the CEO wasn’t able hit their performance benchmarks while in the position, like Al Walker who lagged behind his targets.
This type of behavior is frowned upon by shareholders because it is not in their best interest. Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware, further explains that “sweeteners aren’t for the shareholders, and when they’re present, it always calls into question why management accepted a deal. That’s why they’re a bad idea.” As shareholders, we hope that the “golden parachutes” won’t impede management’s judgment in deciding on which deal to move forward with.
Oil Outlook
Crude oil prices have been following the US equity prices for at least the last 52 weeks, which is contrary to most macroeconomic principles. Crude futures dropped 40% from their high of $75.65 per barrel down to a low of $43.80 a barrel on Christmas Eve. Oil has rallied 37% so far this year riding on the back of OPEC’s production cuts and turmoil in Venezuela.
This oil rally is subject to continue with Trump implementing new sanctions on Iran oil exports, in an attempt to further obstruct the Islamic Republic’s finances. Taking the 1.6 million barrels per day, that Iran currently exports, off the market will have a material impact on oil prices to the upside if this isn’t replaced by another source, considering that oil is a leveraged commodity. This zero-tolerance sanction is going to be fully implemented May 2nd and could cause complications internationally to Iran’s chief oil importers. Below is a chart of Iran oil exports by country.
Deciding on a Deal
As of now Chevron is still fully expecting their deal with Anadarko to go through despite Occidental’s opposing bid. A counter bid from Chevron is expected by analysts though.
Chevron is a much larger operation than Anadarko and Occidental combined. Chevron is over 9x the size of OXY on a revenue basis and produces 4.5x more barrels of oil and gas daily. The infrastructure of Chevron’s extensive operations would likely benefit Anadarko more than an acquisition by a small fry like Occidental that doesn’t have the scale to create the same synergies.
Occidentals proposed $38 billion deal is 50% cash and 50% stock while Chevron is only offering 25% in cash and 75% in shares for $33 billion. The $1 billion break-up fee needs to be weighed as well, considering that Anadarko accepted this agreement even after knowing that Occidental was willing to offer more.
I believe it is likely that Anadarko will end up going with Chevron but whether Chevron will need to up the ante remains to be seen.
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One out of every six people retires a multimillionaire. Get smart tips you can do today to become one of them in a new Special Report, “7 Things You Can Do Now to Retire a Multimillionaire.”
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The Bidding War for Anadarko has Begun: Chevron vs. Occidental
The bidding war for Anadarko Petroleum has begun and no one is happier than APC investors. When the news that Chevron (CVX - Free Report) agreed to acquire Anadarko for $33 billion ($65 a share cash-and-stock deal) was released on April 12th, APC shares soared over 32% in one day. Meanwhile, Occidental Petroleum (OXY - Free Report) has been reaching out to Anadarko Petroleum with merger proposals since late March, and today Occidental public made a $38 billion bid (cash-and-stock deal for $76 a share) representing a 16.9% premium over Chevron’s proposal. APC surged another 12% following this announced, for a total return of 53% over the past 9 days of trading.
APC closed today at $71.40, right between both bids. Chevron was able to lock in a break-up fee of $1 billion with Anadarko, representing about $2 per share of APC. Occidental CEO Vicki Hollub voiced frustration in a letter to Anadarko’s board, saying that Anadarko made this agreement “without even picking up the phone to speak to us after we made two proposals during the week of April 8 that were at a significantly higher value to the transaction you were apparently negotiating with Chevron.” Chevron claimed they weren’t aware of any negotiation between Occidental and Anadarko. Below are the returns for CVX (-6.2%, red), OXY (-7.7%, blue), and APC (52.5%, green) since April 11th.
The Battle for the Permian Basis
The Permian Basin is one of the most fertile oil and natural gas basins in the US and has become the most productive oil fields in the world. Production in the Permian has proliferated over the last 10 years growing from less than 1 million barrels per day (BPD) to 4.2 million BPD (34% of total US oil production), displaying a 425% increase in a decade. This production rate has just surpassed Saudi Arabia’s Ghawar oil field which produced 5 million BPD for decades but recently cut production to 3.8 million BPD.
OXY and CVX are fighting for control of the Permian Basin and Anadarko is the golden ticket. Occidental currently controls the largest portion of the Permian with Chevron as a close second. The acquisition of APC would significantly improve operations for both firms in the Permian, being one of the fastest growing geographic oil production locations in the world.
The Permian has grown to be the “crown jewel” of US oil basins because of its rewarding shale formation. The Permian has 8 distinctive rock levels compared to the 1 or 2 levels found in most other shale locations. This is advantageous because it allows producers to continue to drill in the same location over and over again using the same equipment, cutting costs and improving returns. The breakeven price for most Permian wells is about $35-$40 per barrel, meaning that oil would have to drop almost 50% for these wells to stop being profitable.
Anadarko has a very lucrative piece of land in the Permian Basin with approximately 250,000 acres in the Delaware Basin (part of the greater Permian Basin) producing 160,000 BPD and even more natural gas.
Occidental Petroleum currently controlling the most substantial portion of the Permian with 2.7 million acres and producing 368,000 BPD. This production level has grown over 25% in just one year and is expected to continue this growth. A merger with Anadarko would solidify OXY’s dominant position in the Permian, and the synergies could propel them to become one of the largest US oil and gas producers.
Chevron owns 2.2 million acres in the Permian Basin producing 159,000 BPD. The acquisition of APC would provide many synergies within the Permian because of their almost overlapping current operations. Chevron’s scale and infrastructure will allow them to leverage Anadarko’s core competencies and assets to their fullest potential, making them an ideal candidate for a merger.
The Golden Parachute
One day before Anadarko announced its deal with Chevron the board approved a $22 million increase in bonuses to its top execs in the event that they strike a deal. Anadarko CEO Al Walker was approved to receive a minimum of $43 million following an acquisition by Chevron, $6.7 million more than prior guidelines, according to Equilar.
These “golden parachutes”, as they’ve been coined, are subject to controversy. Paying substantial amounts of money to CEO’s for them to close a deal and subsequently departing doesn’t sound like the most ethical move. Especially when the CEO wasn’t able hit their performance benchmarks while in the position, like Al Walker who lagged behind his targets.
This type of behavior is frowned upon by shareholders because it is not in their best interest. Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware, further explains that “sweeteners aren’t for the shareholders, and when they’re present, it always calls into question why management accepted a deal. That’s why they’re a bad idea.” As shareholders, we hope that the “golden parachutes” won’t impede management’s judgment in deciding on which deal to move forward with.
Oil Outlook
Crude oil prices have been following the US equity prices for at least the last 52 weeks, which is contrary to most macroeconomic principles. Crude futures dropped 40% from their high of $75.65 per barrel down to a low of $43.80 a barrel on Christmas Eve. Oil has rallied 37% so far this year riding on the back of OPEC’s production cuts and turmoil in Venezuela.
This oil rally is subject to continue with Trump implementing new sanctions on Iran oil exports, in an attempt to further obstruct the Islamic Republic’s finances. Taking the 1.6 million barrels per day, that Iran currently exports, off the market will have a material impact on oil prices to the upside if this isn’t replaced by another source, considering that oil is a leveraged commodity. This zero-tolerance sanction is going to be fully implemented May 2nd and could cause complications internationally to Iran’s chief oil importers. Below is a chart of Iran oil exports by country.
Deciding on a Deal
As of now Chevron is still fully expecting their deal with Anadarko to go through despite Occidental’s opposing bid. A counter bid from Chevron is expected by analysts though.
Chevron is a much larger operation than Anadarko and Occidental combined. Chevron is over 9x the size of OXY on a revenue basis and produces 4.5x more barrels of oil and gas daily. The infrastructure of Chevron’s extensive operations would likely benefit Anadarko more than an acquisition by a small fry like Occidental that doesn’t have the scale to create the same synergies.
Occidentals proposed $38 billion deal is 50% cash and 50% stock while Chevron is only offering 25% in cash and 75% in shares for $33 billion. The $1 billion break-up fee needs to be weighed as well, considering that Anadarko accepted this agreement even after knowing that Occidental was willing to offer more.
I believe it is likely that Anadarko will end up going with Chevron but whether Chevron will need to up the ante remains to be seen.
Will you retire a millionaire?
One out of every six people retires a multimillionaire. Get smart tips you can do today to become one of them in a new Special Report, “7 Things You Can Do Now to Retire a Multimillionaire.”
Click to get it free >>