Chevron to Shell $33 Billion for Anadarko Petroleum

Energy major Chevron (NYSE: CVX) said April 12 that it has struck a definitive agreement to purchase Anadarko Petroleum (NYSE: APC) in a cash and stock deal that values the latter at $65 a share, or $33 billion.

The offer represents a 41% premium to Anadarko’s share price before the deal was announced. According to the terms of the deal, Anadarko investors will receive 0.3869 shares of Chevron and $16.25 in cash for each share they hold.

This has been a major shake-up to the American energy market.

Why Anadarko?

Chevron believes that Anadarko will prove to be a perfect strategic fit by enhancing the former’s upstream asset portfolio. According to Chevron Chairman and CEO Michael Wirth:

“The combination of Anadarko’s premier, high-quality assets with our advantaged portfolio strengthens our leading position in the Permian, builds on our deepwater Gulf of Mexico capabilities and will grow our LNG business. It creates attractive growth opportunities in areas that play to Chevron’s operational strengths and underscores our commitment to short-cycle, higher-return investments.”

Chevron believes that the deal will unlock annual run-rate synergies to the tune of $2 billion. Of that, $1 billion will be a result of annual run rate cost-saving synergies, while the remaining will be achieved through reductions in capital spending.

The deal will prove accretive to Chevron’s earnings and free cash flow a year after the transaction closes. Chevron also states that the transaction will boost its portfolio of high-grade assets, and allow the company to shed $15 billion to $20 billion worth of assets through 2022. The proceeds from those sales will go toward reducing Chevron’s debt and deliver more value to shareholders.

More specifically, Chevron will boost its annual share repurchase rate to $5 billion as compared to the current rate of $4 billion once the transaction closes.

The boards of directors of both companies have already approved the transaction, which is expected to close in the second half of 2019 once regulatory approvals and other conditions are met. The deal also requires the approval of Anadarko’s shareholders.

A good deal  

Anadarko Petroleum is known for its resilient asset portfolio that’s capable of thriving even in times of weak oil prices. That’s because the company has reduced its capital expenditure budget for 2019 to a range of $4.3 billion to $4.7 billion. For comparison, Anadarko had incurred a capital expenditure of $6.18 billion last year.

But this reduced capital spending won’t hamper Anadarko’s output. The company is forecasting total sales volume of 260-270 million barrels of oil equivalent (BOE) for 2019, which compares favorably to last year’s output of 243 million barrels of oil equivalent (BOE).

Specifically, Anadarko’s oil sales will average between 410,000-435,000 barrels of oil equivalent per day (BOE/day). For comparison, the company had produced 383,000 BOE/day of oil in 2018.

As such, Chevron is making the right move by acquiring a company that’s moving in the right direction from an operational point of view. Anadarko’s efficient assets and the resulting synergies from the acquisition will prove beneficial for Chevron in the long run and help it take advantage of the current oil price scenario.

The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Capital 10X hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.

Harsh Singh Chauhan has a wealth of experience evaluating publicly-traded companies across several verticals, including technology, oil and gas, retail, and consumer goods. His financial writing has been published across platforms such as The Motley Fool, TheStreet, and Seeking Alpha. Harsh's philosophy is to find great businesses for the long run based on company fundamentals and industry prospects. Address: 682 Indian Road, Toronto, Ontario, M6P 2C9. Phone: 416-721-8257.


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