ConocoPhillips, Oxy, Apache, Noble Energy are the cleanest comps in upstream energy – John Gerdes

Permian pure-plays Pioneer, Concho and Diamondback have the assets but will be tougher deals to do while trading at a premium to their peers – Noah Barrett

Pioneer, Concho, Diamondback and Endeavor: at the end of the day they are inclined to be merged into a major integrator – Gerdes

By Bevo Beaven, Editor, Oil & Gas 360

Last week’s news out of San Ramon sent shock waves through the shale world when Chevron (stock ticker: CVX, $CVX) said it was acquiring Anadarko Petroleum (stock ticker: APC, $APC). Oil companies and investors from Midland to Allentown issued a collective “Say what?”. But pretty soon, the announcement of the industry’s third largest M&A deal in history gave way to speculation and analysis.

During the Chevron conference call relating to the Anadarko acquisition, Chevron Chairman and CEO Mike Wirth said, “You can clearly see how the addition of Anadarko makes our leading position in the Delaware Basin even stronger. Our combined acreage results in a 75-mile wide highly contiguous corridor, where we can drill, develop, operate and build infrastructure with great efficiency. We plan to accelerate the development of Anadarko’s acreage, increasing the number of rigs with pad drilling, long laterals in our latest basis of design. Great rocks, liquidsweighted and with a lower royalty post-closing, as a result of Chevron’s mineral ownership in part of Anadarko’s acreage, getting more out of the Permian sooner is an important value driver. If you liked Chevron’s Permian position before, you’ll like it even more now.”

Aftershocks from Chevron-Anadarko: Experts Discuss What’s Next for U.S. Oil Companies

John Gerdes, energy research head, MKM Partners.

Greenwich-based MKM Partners hosted a conference call to discuss the blockbuster announcement. MKM’s call featured expert analysis from its top-notch energy analyst John Gerdes.

Gerdes, who has led research teams and analyzed deals in the E&P sector for KLR, Canacord Genuity, Suntrust and Raymond James, laid out the impacts of the deal, the nuances of Oxy’s failed offer, what will come out of the consolidation idea for U.S. oil and gas companies, and how he sees the effect on the rest of the industry.

Is the price for Anadarko fair?

JOHN GERDES: “It is right where it should be. This is a very elegantly traded deal at a lot of levels. At our $66 fair value, it is almost in alignment at $65. This is in and around the mid-$60s [per share of Anadarko], which on a net present value basis, on a true discounted free cash flow economic return NPV basis, this is right as it should be.”

Aftershocks from Chevron-Anadarko: Experts Discuss What’s Next for U.S. Oil Companies - Oil & Gas 360

Source: Chevron

Why did Chevron’s bid for Anadarko at $65 beat the reported $70 bid from Oxy?

JOHN GERDES: “This was actually a very erudite bit of navigation by the board of Anadarko.  The board is thinking logically about industrial logic. At the end of the day what you’re dealing with here is Chevron with its global model.

“Chevron and Anadarko have overlap in several core areas:

  • First and foremost is the epicenter of that value which is the Delaware Basin, which Oxy does as well. Transcendent to that is a substantive deepwater presence in the deepwater Gulf of Mexico and Chevron as well has a global LNG capability which will marry nicely with the evolution of East African gas offshore Mozambique. Oxy does not have a deepwater presence nor a global LNG disposition, so the industrial logic here much more favors Chevron and integration into Chevron rather than Oxy. Overall that is likely the main reason, the primary bullet point, although at face value there is a superior bid at offer, but in the context of the industrial logic, Chevron makes substantively more sense.
  • Secondly, you’re obviously dealing with at one end you’ve got Oxy with about $50 billion in equity capital market cap, Chevron at $225 billion. So you are dealing with a more fragile, I’ll call it that, currency, with an Oxy currency, than you are with Chevron’s currency.
  • The tertiary attribute would be process cycle time—you’re most probably looking at a shareholder vote in the case of Oxy and that is not the much more streamlined process without a shareholder vote as it relates to Chevron.”
Aftershocks from Chevron-Anadarko: Experts Discuss What’s Next for U.S. Oil Companies - Oil & Gas 360

Dashboard from EnerCom Analytics: Anadarko snapshot as of Friday April 12, 2019. See the EnerCom interactive Valuation and Benchmarking dashboard free on Oil & Gas 360 – Dashboard tab.

Will Oxy make another run at Anadarko?

JOHN GERDES: “We don’t see any scenario where Occidental does anything beyond what they’ve already done. Let me back up and say the following: the mid-$60s reflected value in this transaction is a full and fair value. To start to talk about numbers that are already $70+ is already pushing the envelope in terms of a value ascribed, and so we think it’s highly unlikely. It’s basically de minimis that Oxy comes back. There’s been an ongoing dialog probably with all of these parties—a robust dialog. So, no, this is a ‘dead in the water’ issue as it relates to Oxy.”

Aftershocks from Chevron-Anadarko: Experts Discuss What’s Next for U.S. Oil Companies - Oil & Gas 360

Source: Occidental Petroleum

What about the other major oil companies as potential counterbidders for Anadarko?

JOHN GERDES: “Shell is actually the most natural here because the epicenter of value is the Delaware Basin, and there’s literally an overlap in asset footprints and operatorships specific to the Delaware Basin. Our view has been that Shell was probably the most probable entity than anyone else because of that overlap. Shell obviously has the deepwater capability—having worked for Shell years ago, they were early days in deepwater; I had the benefit of that experience. And Shell is very much a global LNG player.  And so there are the same industrial overlays that there is with Chevron.

“It’s also our view that given the fact that there’s basically almost a dovetailing of a footprint in the Delaware Basin, there’s almost an impossibility from a fiduciary board perspective that there wouldn’t be a certain amount of vetting process with that most natural of potential acquirors.

“That said, maybe they [Shell] didn’t quite see the level of ascribed value that is being put forward by Chevron.

The Colorado political risk and regulatory uncertainty ‘warded them off a bit’

“Another reason is the ‘pseudo-poison pill’ related to Colorado and operatorship [of oil and gas assets] in a changing political environment in the country and specific to that state’s degree of regulatory uncertainty.

“We think most of that has been vetted through now and clarified with Senate Bill 181 in Colorado, but that may have warded them off a bit on the margin that Chevron wasn’t as concerned about. But again I think it would be almost completely improbable that Shell didn’t have at least some degree of interaction, probably robust communication in the context of a possible transaction, given the board’s responsibilities.

If Oxy can’t get Anadarko, who else might Oxy acquire?

JOHN GERDES: “It’s pretty obvious, based on the aggressiveness of the bid that they put forward for Anadarko, that Occidental has a sense of urgency—an acute desire to consolidate.

“That urge was not satiated by Oxy being the failed counterparty in this set of circumstances, so, yeah, I think Oxy will be, as someone put it, ‘on the prowl’ and clearly they are on the prowl.

“The thing you’ve got to be careful about when you look at the mosaic of the Permian Basin, when you look at the major players, which obviously in the Midland it’s Pioneer, in the Permian it’s Concho and secondarily it’s Diamondback and then privately-held Endeavor, honestly [looking at] the size of those enterprises, I think at the end of the day they are wanting to be and inclined to be merged into a major integrator.

“The challenge that you have with an Oxy-Anadarko combination, it’s really just one step to where you’re ultimately going. A lot of those major pieces of assets, the properties, should be logically—economically logically—domiciled in the major integrated [oils], with the fullness of time.

“I think that’s an element of the challenge that Oxy ran into with their unsuccessful attempt with Anadarko.

“Fragmented industries remain fragmented when there’s access to capital. With a lack of access to capital, fragmented industries consolidate. We’re in motion doing that. I don’t really see the big enterprises merging with other big independent enterprises, I see them being assimilated into the major integrated entities.

Could you provide color on Anadarko’s Mozambique LNG assets?

JOHN GERDES: “First of all, they’ve discovered 50+ TCF worth of gas. What is the sequencing? They are imminently on FID. It will be an affirmative final investment decision that is imminent—meaning it is imminent in the next few months. Coattail with that the project financing for two-thirds of the initial two-train project. That project is 12.88 million metric tons per year of capacity.

“What that would do in 2019 would be FID, financing in place, and you’d begin the construction process which is a five-year process, and then you’d go operational at that level which is about 2 Bcf per day of equivalent gas rate. That level of LNG exports outbound out of east Africa, with the target market clearly the far east and to some degree India is really a focal point market.

“We’ve been able to back-of-the-envelope some of that and we do see an incremental value wedge beyond our $66 per share value of $5 to $10 as a consequence of that buildout with the fullness of time.

“That’s the initial two trains. You’ve got enough resource depth there to potentially see that evolve over a decade or so to about a six-train facility.

“East Africa, in terms of Area One which is the operatorship that Anadarko has and Area Four which Exxon is front and center in terms of operatorship, you’re looking as well over 100 Tcf worth of gas resource that will be monetized through LNG over in the next decade or two. So that’s the business evolution specific to that asset.

In the Delaware Basin what other companies have large acreage positions besides Anadarko?

JOHN GERDES: “Chevron does, Shell does, Exxon does. You’ve got Concho, you’ve got Oxy, and then it starts to get to smaller-tier people who are specific to the Delaware Basin. Those are all the bigger ones that have bigger footprints in the Delaware Basin.”

For people who are trying to figure out downside for Anadarko and might be using peer multiples to do so, what would you say are the best comps?

JOHN GERDES: “Honestly there’s not a good clean comp, but in terms of your question, Oxy would be a decent comp.  Concho and Pioneer are really very concentrated business models that would be comps. ConocoPhillips is a comp for you. Your cleanest comps are ConocoPhillips and Oxy probably, because the issue with Concho and Pioneer is that they are Permian Basin-centric business models. ConocoPhillips and Oxy clearly are not.  Apache is kind of a unique model, but you could add Apache as well. And as a smaller one—a mini-Anadarko—you would add Noble Energy.

Aftershocks from Chevron-Anadarko: Experts Discuss What’s Next for U.S. Oil Companies - Oil & Gas 360

See Peer Group Dashboard from EnerCom Analytics on Oil & Gas 360 home page tab.

The cleanest comps in upstream energy land

So, your best comps are ConocoPhillips, Oxy, Apache, and Noble. Those are really your cleanest comps in ‘upstream energy land’,” Gerdes said.

Aftershocks from Chevron-Anadarko: Experts Discuss What’s Next for U.S. Oil Companies - Oil & Gas 360

Noah Barrett, energy research lead analyst, Janus Henderson

On Monday, Oil & Gas 360® spoke with Janus Henderson Investors’ lead Energy Research Analyst Noah Barrett in an exclusive interview about Chevron-Anadarko and the fallout from it. Before Janus Henderson, Barrett has been involved in energy research for Institutional Capital LLC, Fiduciary Management Associates, LLC, and Morgan Stanley.

OAG360: How do you believe this deal will affect the U.S. independent E&Ps going forward?

NOAH BARRETT: “I think Anadarko was a little bit of a special situation in that Chevron just saw an opportunity to buy some really high-quality assets at a pretty attractive valuation. I don’t think they necessarily wanted everything in the Anadarko portfolio, but they certainly valued the Permian.

“I think there are good synergies with the Gulf of Mexico and certainly the Permian, and some of the other assets they might keep, or they might sell.

Chevron-Anadarko deal doesn’t necessarily kick off the next wave of U.S. energy M&A

But I don’t necessarily think that this kicks off the next big wave of U.S. energy M&A, at least not immediately.

I say that because if you look at the other potential buyers out there—Exxon, the European integrateds and maybe even Oxy—they don’t want some of the other stuff in the Anadarko portfolio. But if you look at who they might be interested in buying, the other Permian pure-plays, like a Pioneer, a Concho, a Diamondback, those deals certainly can get done, but it’s going to be a little bit harder just because those stocks are trading at a premium to the group, and then you have to pay an acquisition premium on top of that premium multiple.

“I think what’s interesting about the deal is this: Chevron being the biggest in the Permian, or one of the biggest operators, they clearly felt like they wanted to get even bigger, which would suggest that Exxon and especially the European guys that are subscale in the Permian, they might feel some pressure to get bigger as well. But I still think they need to fit any potential deal into their framework and make sure that you can get decent returns if you’re paying a high multiple for a Permian pure-play.

OAG360: Do you expect the deal to close?

NOAH BARRETT: “I think so. It seems like Oxy came in with a higher offer price and more of it in cash, but the Anadarko management team was more comfortable with the Chevron offer.

“I think Chevron shareholders certainly will vote the deal through. For Anadarko shareholders, it’ll be put to a vote, but I don’t see any reason unless a competing bid was significantly higher and equally low risk, I don’t see why Anadarko shareholders wouldn’t vote it through. And then from a legal anti-trust perspective I don’t see any issues why the deal couldn’t get done.

Aftershocks from Chevron-Anadarko: Experts Discuss What’s Next for U.S. Oil Companies - Oil & Gas 360

Source: Chevron


[EDITOR’S NOTE: During the Chevron conference call about the Anadarko acquisition, Chevron CEO Mike Wirth made a statement about Anadarko’s DJ Basin assets. “Another attractive position in Anadarko’s portfolio are the shale and tight assets in the DJ Basin,” Wirth said. “This advantaged acreage is low royalty, extensively cored up and liquids-rich. The returns in Anadarko’s DJ Basin operations have increased with lower costs, increased lateral lengths and higher EURs. We really like what they’ve done here and believe we can leverage our factory model and proprietary technologies to maintain and perhaps, improve performance.”]

OAG360: Didn’t you reference Anadarko’s DJ Basin assets as a possible divestiture target for Chevron?

NOAH BARRETT: “I say it mostly because Chevron doesn’t have an existing position there. Even though from a geological perspective it’s a great asset, and it’s a high return asset. It’s actually the biggest producing asset in Anadarko’s portfolio. But [if you are Chevron] you weren’t in the DJ prior to the deal, but now you have it.

Aftershocks from Chevron-Anadarko: Experts Discuss What’s Next for U.S. Oil Companies - Oil & Gas 360

Source: Chevron

You have uncertainty around the Colorado regulatory picture on top of dealing with environmental activists every election cycle

“And then you have the additional wrinkle of the uncertainty around Colorado regulatory. Regulatory headwinds and dealing with environmental activists every election cycle. And so, I think Chevron is okay holding it, but it doesn’t really overlap with anything else in their portfolio. So, if they could dispose of it at an attractive price I wouldn’t be surprised to see that done. And if they can’t [sell it at an attractive price], I think they’re okay just operating it.

“Importantly, too, within the context of Chevron, it’s not big as a percentage of overall production. So, Chevron can probably manage the regulatory risk a little bit better; whereas, for Anadarko given that it was such a big asset in the context of their company, they got whipped around a lot by Colorado headwinds.

OAG360: Who do you see as a potential buyer for Anadarko’s DJ assets?

NOAH BARRETT: “That’s tricky. If you look at, Anadarko was the biggest producer in the DJ. Certainly Noble could double down. I don’t know if Noble has the financial capacity or the will to do a deal. But if Noble wanted to buy out Anadarko, Noble would become the 800-pound gorilla in the DJ.

Aftershocks from Chevron-Anadarko: Experts Discuss What’s Next for U.S. Oil Companies - Oil & Gas 360

Source: Noble Energy

“But besides that, you’d be looking at private equity. From the public companies, really, Noble comes to mind as the other big, public operator in the basin.

OAG360: You mentioned the private equity universe. Who do you think might look at that?

NOAH BARRETT: “I’m not quite sure. Seemingly most of the private money right now is being focused in the Permian, but with private equity, if they have a longer-term view and they feel like they can get, again, really high quality assets at a reasonable price and they can somehow get comfortable around a long-term Colorado regulatory outlook, I don’t necessarily think it has to be a Colorado focused PE player. It could be one of the larger commodity-focused PE funds.

OAG360: How is Chevron or any major going to be better, in your opinion, at developing the shale in the Permian than, say, a large pure play Permian independent like Pioneer or Concho?

NOAH BARRETT: “That’s why Anadarko’s a little bit unique. What helped the deal get done, was, if you looked at Anadarko, is their SG&A – on an SG&A per barrel basis they screened a little bit higher, or a lot higher than the pure group.

“I think for Chevron, they saw that as an opportunity to come in and get some unnecessary costs out of the system. If you look at some of the other guys like Concho or Diamondback in particular, those guys are pretty lean. They run pretty efficiently as it is now. I don’t necessarily think that the same template applies for a major — those looking to buy Concho or Diamondback, for example where they can come in and really get all these excess costs out of the system. So, Anadarko is a little bit unique in that perspective.

OAG360: I know you said you didn’t see this thing kind of kicking off a wave of M&A but, you know, thinking about who the big oil companies are, who do you see as somebody who might decide that now’s the time to go after more shale?

NOAH BARRETT: “Really it boils down to Exxon. Again, Exxon has a pretty massive Permian position. But, given that, they keep a close eye on what Chevron is doing.

Aftershocks from Chevron-Anadarko: Experts Discuss What’s Next for U.S. Oil Companies - Oil & Gas 360

Exxon reported at yearend 2018 that its current Permian Basin acreage position is 1.8 million net acres across the Delaware, Midland and Central Basin Platform.

Chevron, again, being big and still wanting to get bigger, I think Exxon probably would like to increase their own Permian position.

And the European majors, too. Shell and BP certainly have Permian positions but in the context of their companies, in the context of their portfolios, their Permian positions are relatively small. I think they’d certainly like to get bigger.

Aftershocks from Chevron-Anadarko: Experts Discuss What’s Next for U.S. Oil Companies - Oil & Gas 360

Source: BP

“Total comes up as a name, as a company that has zero Permian exposure right now. The messaging from them has been, they’re interested but right now the bid-ask spread is just too wide. They think valuations are too rich. So I think they’re less likely to be looking. And then among the U.S. public guys, Oxy certainly has to be out there given that they had interest in Anadarko. And Conoco is probably the last one where they’re a pretty big producer. But for a company their size the Permian looks a little bit subscale. I think they’d like to get bigger. But again, I think Conoco being pretty disciplined, I think for them it’s all about [doing a deal] at the right price. And so, they don’t feel pressure to get bigger just for the sake of getting bigger. It has to fit into their cost-to-supply framework.

OAG360: Do you think Oxy will get back in this thing with a takeover bid or something like that?

NOAH BARRETT: I would be a little bit surprised, I guess, just based on the reaction of the stock price on Friday, and then some carryover today. So their stock price was weak, and I think some of their shareholders were a little bit concerned that they were going to make a bigger and better offer for Anadarko.

And I think the concern from the shareholders of Oxy is: Oxy has a big Permian position. Some of it is Central Basin, which is a little bit lower quality. But the rest of that Anadarko portfolio–deepwater Gulf of Mexico, Mozambique LNG, that’s not really as good of a fit with Oxy as it is with Chevron.

NOAH BARRETT: So, I’m sure Oxy has a vision for what they want to do and hopefully, you know, they take shareholder feedback into that. They don’t necessarily always have to do what their shareholders say, but I think given the reaction of the stock price—and I talked to investor relations at Oxy on Friday and gave my opinion—they may be a little less enthusiastic about trying to get into a bidding war with Chevron on this one.

OAG360: What does this deal mean for Anadarko’s 4,700-employee headcount?

NOAH BARRETT: I think at least in the Permian, Chevron will probably take some of Anadarko’s top employees. There’s a lot of infrastructure. As far as the acreage, there is some overlap but it’s more adjoining acreage as opposed to overlapping acreage. So there probably will be some headcount reductions in the Permian.

But the DJ Basin, Mozambique, those are a little bit unique assets and Chevron not having operations there wouldn’t necessarily see a ton of Anadarko jobs lost as a result of that. Probably the other, biggest area in the portfolio where you could see some overlap and some cost savings in terms of headcount would be the Gulf of Mexico.

OAG360: What’s your general feeling about this deal overall?

NOAH BARRETT: From a Chevron perspective, I think the deal makes sense.

It’s one of the benefits of being a large integrated with a strong balance sheet. The ability to do big deals like this. Anadarko stuck out – wouldn’t say stuck out like a sore thumb but it definitely was highlighted as trading at a pretty big valuation discount to the peer group.

And importantly, I don’t think the valuation discount was because of concerns about asset quality. I think it was concerns about Colorado regulatory headwinds, maybe how to pay for Mozambique, but generally the Anadarko assets were well understood to be really high quality.

So, for Chevron, as a major being able to get bigger, to buy high quality assets at a reasonable price, I think that’s good for them.

Deal sends the message that the Permian is still the place you want to be

I think the message the deal sends is that the Permian is still where you want to be.

If you’re investing capital, that incremental dollar capital is going to go into the Permian. I think Chevron said it well when they were asked about why they felt the need to get bigger in the Permian, and their CEO Mike Wirth commented that it’s low risk, it’s the highest return in their portfolio and its short cycle. Those three characteristics make it pretty attractive.

So everyone else that is looking to acquire, they’re probably trying to figure out how to make the math work on their end, and I think for other operators that don’t have Permian exposure, it highlights that at least in the U.S. onshore, the Permian is still the place to be. For the foreseeable future it looks like it’s going to continue to be the basin with the most activity.




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