Chevron (stock ticker: CVX, $CVX) Chairman and CEO Michael Wirth went on the morning cable business shows and hosted a conference call today, saying his company’s acquisition of Anadarko Petroleum (stock ticker: APC, $APC) is “the highest return investment dollar that we can spend.”

During his company’s conference call, Wirth responded to analyst questions about plunking down $33 billion in cash and shares to buy Anadarko. Wirth said “our priorities are unchanged. The dividend is priority one. Second is to reinvest in the business. Third is to maintain a strong balance sheet and fourth return capital to shareholders with share repurchases. It’s a resource acquisition business… we are constantly adding resources through exploration, through technology and through transactions.”

Bloomberg News analyst Stuart Wallace looked at the strategy behind making the acquisition, looking particularly at the LNG and shale components that Anadarko offers Chevron. Wirth said in an interview on Bloomberg TV, “It’s a really important deal and I think it raises some really interesting questions about ‘who might be next?’. Wallace said he wouldn’t speculate on any names or other pending deals,“but it’s clear that many of the other big players in this space—that is big oil—have to be looking at their own deals to get into those two spaces in a bigger way.”

He was asked if it was simply a consolidation of deepwater and shale and did he expect to see more consolidation in that space?

“I think particularly on the gas side—Shell obviously made that big bet with British Gas some time ago and that’s really paid off. And everyone else is really looking at that market. It’s evolving into a spot market and a real market, away from what it was, and there are some really interesting margins to be made there. So in terms of that side of the deal, I think that you can expect more of that.

Look for more M&A in the Permian

Referencing the Anadarko shale assets in the Permian Basin, Wirth said, “you’ve already seen absolutely crazy numbers being thrown about for shale assets, so that again is going to continue because there’s no sense that the shale story is about to fall off a cliff anytime soon.

Chevron CEO Michael Wirth Talks about what Chevron is Getting with the Acquisition of Anadarko

Delaware Basin Acreage: Chevron in blue, Anadarko in yellow – the core of the core. Source: Chevron

Wallace was asked if the European oil companies “can compete with the rollup we’re going to see in American hydrocarbons?”

“Absolutely they can,” Wallace said. “I mentioned Shell earlier and that’s exactly the kind of companies to focus on. That’s a company that took a really, really big bet on gas and at the time many people were skeptical of it, and it’s worked out pretty well for them. So absolutely they have the appetite to do it.”

“What’s the synergy overlay going to be? How Venn diagram is this with Chevron and with Anadarko,” Bloomberg Surveillance Anchor Tom Keene asked.

“Not so much on the LNG side—that’s kind of a stand alone idea. But in terms of the shale patch itself, it’s a consolidation of assets across the Delaware Basin. And there, it does make a lot of sense. But they’re also saying they’re going to sell a lot of assets, which is sort of the tail end of this deal going through … but in terms of the shale play you can see the connection between the two,” Wallace said.

The three legs of what Chevron bought with Anadarko are an LNG business, core Delaware Basin assets adjacent to its own acreage, and complementary deepwater assets in the U.S. Gulf of Mexico.

Chevron defined the value it received in these words:

  • Shale & Tight– The combination of the two companies will create a 75-mile-wide corridor across the most attractive acreage in the Delaware basin, extending Chevron’s leading position as a producer in the Permian.
  • Deepwater– The combination will enhance Chevron’s existing high-margin position in the deepwater Gulf of Mexico (GOM), where it is already a leading producer, and extend its deepwater infrastructure network.
  • LNG –Chevron will gain another world-class resource base in Mozambique to support growing LNG demand. Area 1 is a very cost-competitive and well-prepared greenfield project close to major markets.

Wirth had said in the announcement and during the call that this acquisition “underscores our commitment to short-cycle, higher-return investments.” Chevron said it expects the Anadarko acquisition to deliver $2 billion in anticipated annual operating cost and capital synergies, and that it would be accretive to free cash flow and earnings one year after close. That does indeed sound like a short-cycle, high-return investment.

On the call, Wirth was asked about the Permian acreage and Chevron’s plans for it. He described the Anadarko acreage as “blocked up and really well-set for large scale pad development. We’ve seen continued improvements in pad-scale development, performance in all attributes—drilling, completions, recoveries, the efficiency of our infrastructure buildout, and so this gives us the ability in the core of the core—and I’ve got to tell you this is really in the sweet spot—to have a very, very large and even more contiguous area for development. This will accelerate production, it will accelerate royalty and we think the combination of the land position, the strong royalty position and strong performance will further deliver value in this high-return, short cycle asset class.”


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