Breaking down the numbers

By Richard Rostad, analyst, Oil & Gas 360

Chevron (ticker: CVX) uprooted the eerily quiet U.S. exploration and production M&A landscape today when it announced it had agreed to acquire Anadarko Petroleum (ticker: APC).

The total deal value is $50 billion, making it the third-largest U.S. oil and gas transaction in history, and the largest since Exxon (ticker: XOM) purchased Mobil in 1998.

This is the seventh-largest global oil and gas deal in history; the most recent larger transaction was Aramco’s $69 billion acquisition of SABIC.

This deal is roughly comparable to ExxonMobil’s acquisition of XTO Energy in 2009 and ConocoPhillips’ (ticker: COP) purchase of Burlington Resources in 2005. Each acquired major U.S. E&P companies through large, primarily stock-based transactions. Exxon’s XTO deal was valued at $41.4 billion, while Conoco paid $36.1 billion to for Burlington.

Chevron’s acquisition of Anadarko will make it an official oil giant: the third-largest non-NOC oil and gas producer in the world, just behind Exxon and Shell (ticker: RDS). Exxon produced 3.8 MMBOEPD in 2018, while Shell produced 3.7 MMBOEPD. Chevron and Anadarko combined produced 3.6 MMBOEPD.

Making History: Third-Largest U.S. Oil & Gas Transaction Wakes Up U.S. E&P

The acquisition significantly boosts Chevron’s Permian presence, as Anadarko holds a very consolidated position in the heart of the Delaware Basin. The deal accelerates Chevron’s Permian plans, and the company expects to surpass its previously-announced Permian target of 900 MBOEPD in 2023.

Making History: Third-Largest U.S. Oil & Gas Transaction Wakes Up U.S. E&P

Shifting to U.S. offshore, Chevron and Anadarko also have significant overlap in the Gulf of Mexico, allowing consolidation. The combined company will have significantly more tieback opportunities, making development of smaller fields possible.

Making History: Third-Largest U.S. Oil & Gas Transaction Wakes Up U.S. E&P

Leg number three of the three legged purchase is Anadarko’s Mozambique LNG project, which is particularly attractive for Chevron, as the company has extensive LNG experience. Chevron plans to continue with the current timeline, meaning an FID should be forthcoming soon.

Cost savings represent nearly all of Anadarko’s G&A

Chevron forecasts $2 billion in annual synergies from the deal, split evenly between capital savings and elimination of redundancy. Headcount reduction will likely cut deep, as Anadarko spent $1.1billion on G&A last year.

Moving forward Chevron plans to significantly prune its assets, and is forecasting $15 to $20 billion in divestments between 2020 and 2022. The proceeds from this move will be used to either reduce debt or returned to shareholders. Chevron also plans to accelerate its share repurchase program from $4 billion per year to $5 billion per year, as the cash flow from Anadarko allows greater flexibility.

Offer represents 39% premium

Chevron will pay $16.25 cash and 0.3869 Chevron shares for each Anadarko share, a total of $25 billion in equity and $8 billion in cash. Based on yesterday’s closing prices this equates to $65 per share, a 39% premium. In addition to the $33 billion in equity and cash, Chevron will assume Anadarko’s $15 billion in net debt and additional non-controlling interests.

Making History: Third-Largest U.S. Oil & Gas Transaction Wakes Up U.S. E&P

While this deal has a high premium, it follows a sharp decline in Anadarko’s stock price as oil prices fell in 2018. Anadarko traded above $65 for much of mid-2018, most recently in late October. Anadarko also exceeded $65 in late 2016 and early 2017. It is also relatively cheap for Chevron, as the ratio of Anadarko’s share price to Chevron’s is at the lowest level in at least 10 years.

Making History: Third-Largest U.S. Oil & Gas Transaction Wakes Up U.S. E&P

Based on a $50 billion total deal value, Chevron is paying $33.94 per BOE of reserves, or $75,085 per BOEPD. These are well above the average of $12.10 per BOE and $51,700 per BOEPD among publicly traded U.S. E&P companies. A reserve valuation of $33.94 per BOE is below only two companies, both of which collect mineral rights. Anadarko’s implied production valuation is much more in line with other publicly traded companies, as 13 E&Ps are currently trading at higher EV/production ratios.

Oxy offered more money, but was rebuffed: CNBC sources

Chevron was not the only company interested in Anadarko, and was not even the highest bidder according to CNBC. Occidental Petroleum (stock ticker: OXY, $OXY) is reported to have offered $70 per share for Anadarko, including a higher proportion of cash than Chevron is offering. However, several factors likely pushed Anadarko to accept Chevron’s offer over Oxy’s. Chevron will not need to take a shareholder vote to close the deal, while Oxy would have. Such votes can sometimes be difficult, especially if conditions significantly change since the deal’s announcement, and activist investors sometimes derail agreements. CNBC reports the Oxy offer also had some structural issues that discouraged Anadarko from accepting.

Unnamed sources told CNBC that Oxy is currently considering options, and may make a counteroffer to Chevron’s. The Chevon-Anadarko breakup fee is reportedly 3% of the deal price, or $1 billion, though, which will discourage a bidding war. Anadarko trading slightly below the offer price, indicating investors do not expect counteroffers.

Q&A from CVX conference call

Q: Let me point straight to the Permian Basin, clearly, probably the biggest driver on the transaction. You’ve already got a pretty long drilling inventory and with the low and no royalty EPA position that you have, can you talk about how this is value accretive from an NAV standpoint? Are there some synergies that can be achieved just in terms of how you develop the acreage? Is it more about ramping up the pace of drilling, anything else you could add there? And then just — I’ll ask the follow up right away, I’ve asked this before, how big are you comfortable with the Permian becoming as a percentage of your overall portfolio?

CVX: Anadarko’s acreage and ours abut out in the Delaware Basin in particular. Their acreage is blocked up and really well set for large-scale pad development. We’ve seen continued improvement in pad scale development, performance at all attributes, right, drilling, completions, recoveries, the efficiency of our infrastructure build out and so this gives us the ability in the core of the core. And I got to tell you, this is really in the sweet spot to have a very, very large and even more contiguous area for development. And so this will accelerate production, it will accelerate royalty and we think that the combination of the land position, the continued strong royalty position and strong performance will just further deliver value in this high return short cycle asset class. And so, it’s not about getting bigger in the Permian, it’s about getting better in the Permian and we think this makes us even better in the Permian.

Your second question is, is one that I think we’ll be talking about over time, we’ve laid out our view on the Chevron portfolio loan of being a 900,000 barrels in 2020. And obviously this will take that number up. I just remind you, this is short cycle, it’s — we’re going to be cash flow positive next year, we’re not changing that guidance and it’s the highest return investment dollar that we can spend and the technology and performance improvement unlocks more and more recovery in this asset over time. And so, it’s low risk below ground, it’s lower risk above ground than about anywhere in the world and it’s high return. And so having a great position in a low risk, high return basin that is short cycle is a really attractive thing.

Q: My first question is about Mozambique. You pointed out in the prepared remarks that the project has advanced quite a bit commercially and so you feel good enough about those terms to take it in today, but with Chevron there now your portfolio structured differently, perhaps those terms might have been different if you were executing on that component the whole time. Do you have any inclination to come in and try to execute some kind of change to those terms, are you happy with the way Mozambique is structured commercially today?

CVX: We’re happy with the way it’s structured commercially today, Sam. Anadarko has done a really nice job with this and Al and his team, and it’s a world-class team, truly a world-class team, and we know some of their people and have known them for a long time, they’ve done a terrific job in bringing this project along and are making great progress and they’ve got 9.5 million tons of SPAs in place and it’s moving steadily towards FID, which we support. So, no, I’m not going to go back and try to revise history. This is a great project that is moving towards execution, and we are strongly supportive of it.

Q: I have two questions, please. The first one was on — maybe just your general thoughts on entering Mozambique, Mike. Given some of the execution issues in Australian LNG and on the Greenfield projects, how do you think the company is positioned to execute on a fairly large-scale complex projects such as Mozambique LNG? That’d be the first question. And then, secondly, in the Permian, I believe Anadarko has a decent stake in the midstream business. Could you just talk about what the attractions of increased scale in the midstream for your — is to your Permian position going forward? Thank you.

CVX: You’re right, our Australian LNG projects are ones that — they are now producing and producing well. The execution was something that we could have done better at and we’ve learned a lot of lessons from that. We’ve, through the diligence process, had a chance to look pretty closely at the plan of development, the contracting and an execution planning that Al and his team have done and we’re very impressed with it. And, in fact, our intent is to be sure that we preserve what we think is a strong team, a strong approach and follow through on what they’ve laid out and the intent is not to come in here and make a lot of changes. We do have lessons that we learned in building these kinds of plans that we want to be sure that we share as appropriate when we reach a point where that is appropriate.

But this is set up to be delivered at a very competitive cost and we like the — we like what we’ve seen on all the engineering and development and execution planning and we would intend to see it through on the path that it’s on and the only where we can add people with experience and perspective or maybe some advantage costs on certain goods that we might have master contracts for where we could help the project be even stronger, but we think that is well positioned for execution and we think that what we’ve learned is both a little humbling and also valuable as we’re involved in another project.

The question on the Permian had to do with the midstream and for those that have followed us for a while, we’ve not established an MLP. We really didn’t have the asset position to do so and what we’ve done is sold off, what I would describe as our merchants midstream assets into a pretty strong MLP market and helped the others grow their midstream MLPs and we’ve realized good value for the assets we’ve sold. Because we didn’t have the footprint or the — really the kind of strategic imperative to do that. That said, Western is a good midstream company and it’s vital to both the Permian Basin and the DJ Basin. And as we’ve seen whether you’re talking about oil last year or gas right now, access to high quality off-take in midstream infrastructure is very important to realizing value out of these unconventional basins. And so, we like the midstream position and we think it’s very strategic relative to a stronger Permian and then a new position in the DJ and we’re looking forward to learning more about that business as this progresses.

Q: I’d like to personally ask the question about the DJ Basin. I believe it’s Anadarko’s largest producing asset and there’s obviously some regulatory headwinds there, unclear what the permit outlook is for Anadarko’s drilling positions post this year. So just wondering, Mike, how you view that asset and that asset growth and potential concerns around that asset within the wider portfolio? Thanks.

CVX: No, we think it’s a very good asset. As I mentioned, it’s highly contiguous. They’ve got — Al and his team had been very efficient in developing it and we look forward to partnering with government officials and communities in Colorado to continue responsible efficient and safe development of that. I recognize the kind of political and regulatory dynamic that has been underway there and we would engage in an appropriate time with all the appropriate parties to be sure that we understand their expectations and that we operate responsibly, which is what Anadarko has done and we would plan to continue to do so. We like the asset.

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