Should Occidental Petroleum Really Buy Anadarko?


Occidental Petroleum [stock_market_widget type="inline" template="generic" color="default" assets="OXY" markup="(NYSE: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"] has thrown a wrench in Chevron’s [stock_market_widget type="inline" template="generic" color="default" assets="CVX" markup="(NYSE: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"] acquisition of Anadarko Petroleum [stock_market_widget type="inline" template="generic" color="default" assets="APC" markup="(NYSE: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"], and is reportedly well-placed to hijack the deal.

What’s the Story?

Chevron’s offer for Anadarko stands at $33 billion. The oil major will pay a third of it in the form of stock. Occidental, on the other hand, is willing to pay $38 billion for Anadarko, but half of that will be in the form of shares.

Reuters Breakingsview estimates that Occidental’s bid is better for Anadarko shareholders:

Even after paying Chevron a $1 billion break fee, Anadarko shareholders would still collect cash and shares worth 46 percent more, on paper, than the company’s stock price before the announcement of the merger with Chevron, compared with 42 percent under that deal, according to a new Breakingviews calculator.

What’s more, Occidental has Warren Buffett in its corner for the deal. It is reported that the Oracle of Omaha was willing to invest a handsome $20 billion into Occidental, double of what he has actually invested.

Of course, Buffett’s investment depends on whether or not Occidental manages to land Anadarko and hijack’s Chevron’s move. But it remains to be seen if the deal actually goes through because Occidental is probably facing dissent from shareholders.

Occidental Faces a Task of Convincing Shareholders

Occidental investors are concerned that the premium that the company is paying for Anadarko doesn’t seem justified because the latter is a Permian Basin player.

Reuters reports that major Occidental shareholders are opposed to the deal, especially because of the costly financing agreement in place with Warren Buffett.

For instance, T. Rowe Price, which is a shareholder in all the parties involved and is Occidental’s sixth largest shareholder, believes that the company can avoid a shareholder vote thanks to Buffett’s financing package. The current Occidental deal requires shareholders to vote on the matter.

Also, Occidental investors are concerned that the premium that the company is paying for Anadarko doesn’t seem justified because the latter is a Permian Basin player. As such, the acquisition won’t diversify Occidental’s holdings as its acreage will be concentrated in just one area.

Moreover, the fact that the oil industry is a cyclical one is another problem for investors. In case of any downturn in oil prices, making such a costly investment for a company of Occidental’s size doesn’t make sense.

Occidental’s market cap at present is $43 billion, while that of Anadarko is at $36.5 billion. So it would be on the lines of a merger of equals if the transaction goes through. Chevron, on the other hand, is a much bigger company with a market cap of nearly $225 billion.

As such, it will be much easier for Chevron to integrate Anadarko into its operations as it will be better placed to handle any potential downturn in oil prices. Occidental, on the other hand, might have to face bigger challenges as integrating an almost identical company into its operations will be a big task.

In all, it looks like Chevron’s offer could be the better fit, and that’s why Occidental investors could scuttle the deal.

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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