Chevron (CVX) Set to Snap Up Anadarko in $50 Billion Deal
America's No. 2 energy producer, Chevron Corporation CVX, placed a huge bet on the future of shale oil and liquefied natural gas ('LNG') today by striking a roughly $50 billion deal to buy a Texas-based upstream company, Anadarko Petroleum Corporation APC. The acquisition will give it access to potentially lucrative Permian Basin acreage, LNG operations in Mozambique, as well as attractive deepwater areas in the Gulf of Mexico (GoM). The buyout is the eleventh largest corporate deal ever involving an energy and power company and is the largest since Royal Dutch Shell's RDS.A acquisition of BG Group plc in 2016. The agreement is subject to Anadarko stockholder approval and regulatory clearance and is expected to close in the second half of 2019.
A Look at the Transaction
Under the terms of the agreement, Anadarko shareholders will receive $16.25 in cash and 0.3869 shares of Chevron for each Anadarko share they own. This combination of cash and stock values Anadarko shares at $65 apiece, a 37% premium to the pre-announcement closing price. The cash component of the deal is worth about $8 billion, while the equity contribution will be obtained through the issuance of approximately 200 million in Chevron shares. The headline price of $50 billion includes the assumption of $15 billion of Anadarko’s debt.
What it means to Chevron
Expanding Shale Operations Further: Anadarko is the biggest upstream player in Colorado’s DJ Basin and has attractive assets in the Delaware Basin in Texas. With around 1.5 billion barrels of proved reserves, Anadarko will significantly augment Chevron’s already strong shale operations.
Chevron's 2018 production was 2,930 thousand oil-equivalent barrels per day (MBOE/d), up 7.4% from a year ago and up 13% over the 2017 output. The company’s substantial Permian holdings of 2.2 million net acres have already realized production growth of 71% in the past year with Chevron targeting a CAGR of 30-40% through 2020. Investors should also note that Chevron's Permian production of 377,000 barrels per day in the fourth quarter was up significantly from the 205,000 barrels per day in last year's corresponding period.
Boosts LNG Output: The Anadarko acquisition also gives Chevron greater exposure to the African LNG market through the former’s $20 billion project in northern Mozambique. The massive export facility, which is likely to see a final investment decision by the first half, will be leveraging production from huge nearby offshore gas fields.
As it is, Chevron already has a solid footing in the LNG sector through its Gorgon and Wheatstone initiatives in Australia, while it also owns the Angola LNG plant. With LNG demand likely to rise to around 384 million tons per annum by 2020 on the back of strong consumption from Asian importers like China, India, South Korea and Pakistan, Chevron’s position as a major supplier of LNG should help the company meet the fuel’s growing demand and help cash flow to improve.
Strengthens Offshore Presence: Chevron is active in the offshore Gulf of Mexico and is one of key players in deepwater field. Should the Anadarko deal go through, Chevron will have access to the former’s 10 offshore facilities in the Gulf.
In particular, Zacks Rank #3 (Hold) Chevron will look to utilize the tie-backs (or existing infrastructures) to Anadarko assets in the Gulf, thereby significantly lowering costs without the requirement to shell out billions in additional capital expenditures.
If approved, the transaction is expected to improve Chevron’s cash flow profile together with substantial annual cost synergies and attractive returns for shareholders.
Apart from greater economies of scale, there are expected to be approximately $2 billion in annual synergies as a result of this deal. Taking advantage of the significant value unlocked by the Anadarko buyout, Chevron intends to increase its annual share buyback program to $5 billion from $4 billion. Importantly, the acquisition is expected to catapult Chevron to the big league – consisting of ExxonMobil XOM and Royal Dutch Shell – as far as cash flow is concerned.
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