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Bull Of The Day: Anadarko (APC)

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The Deal

The bidding war for Anadarko Petroleum Corporation APC is ostensibly over with Chevron (CVX - Free Report) unable/unwilling to match Occidental’s (OXY - Free Report) $38 billion bid. Chevron walks away with a $1 billion breakup fee, which it will use to buy back stock, and Occidental walks away with Anadarko. Occidental will be acquiring APC for $59 in cash and 0.2934 a share, adding up to $74.89 a share as of close yesterday. This will represent a 2.9% premium for APC’s current shareholders if this deal goes through as planned. APC closed yesterday at $72.79.

Occidental is funding this deal with the help of Warren Buffet and his holding company Berkshire Hathaway as well as a little help from Total SA TTFNF. Berkshire Hathaway committed to buying $10 billion in preferred stock to support the Anadarko acquisition. Total SA agreed to purchase Anadarko’s African assets for $8.8 billion which is primarily made up of liquefied natural gas. Both these deals are the contingent factors of Occidental’s acquisition of Anadarko and create some risk if one of them were to fall through.

APC has fallen 4.15% since they agreed to go with Occidental’s offer. Shareholders were hoping for a bidding war between OXY and CVX to raise the price even further. Now APC’s stock price is going to be completely correlated with both the perceived risk of the deal and OXY’s stock price. Every $3.41 change in OXY’s stock price (6% change) will have a $1 effect on APC’s shareholder compensation (1.4%) when the deal does go through.

Many of Occidental’s current stockholders are concerned that they are paying too much for Anadarko, but since the firm is issuing less than 20% of its total equity for this acquisition, it doesn’t require stockholder approval.

Occidental is paying a 19% premium for Anadarko but the synergies in the Permian Basin will make it worth it. Currently, Occidental’s Delaware Basin (part of the Permian) wells perform 74% better than Anadarko’s and spending less on each well. Occidental’s operations are superior to Anadarko’s and will increase their productivity significantly once the deal goes through.

Conclusion

I am confident that this deal will go through with funding secured from Berkshire Hathaway and Total SA’s lucrative deal. The question is when this deal will go through. I might wait to see this stock track down with the rest of the market on trade concerns and buy it at a more equitable price. Beware if this deal does not go through APC will plummet. None the less, I believe this short-term investment has a very high chance of success. APC – Zacks Rank #1 (Strong Buy).

 

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