Deal to acquire Anadarko positions Chevron as Permian leader

Chevron Corp. has agreed to buy Anadarko Petroleum Corp. in a cash and stock deal that values Anadarko at $50 billion and creates growth opportunities for Chevron in areas that play to its operational strengths.

“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,” said Michael With, Chevron chairman and chief executive officer.

In 2018’s fourth quarter, Anadarko produced 691,000 boe/d (nearly 60% oil) from the Denver-Julesburg (DJ) basin (40%), the Permian basin (20%), and the Gulf of Mexico (20%), Cowen analysts said in a research note Apr. 11.

Upon close, Chevron would become the second-largest producing major in 2019 terms from its current position at number four, according to Wood Mackenzie analysts, and puts ExxonMobil, Chevron, Shell, and BP “in a league of their own,” said Roy Martin, Wood Mackenzie senior analyst, corporate analysis.

The new entity would move ahead of Shell and BP in terms of oil and gas production, trailing only ExxonMobil and the five biggest national oil companies in terms of the world’s largest producers of oil and gas, according to Rystad Energy.

Tight oil

As of Feb. 5, Anadarko was operating 14 drilling rigs in the US onshore, with 9 in the Delaware basin, 4 in the DJ basin, and one in the Powder River basin.

Anadarko is the largest producer in Colorado’s DJ basin, where its 400,000 net acres are estimated to hold more than 2 billion boe of recoverable resources. In the Permian’s Delaware basin, Anadarko holds nearly 600,000 gross acres and 8,500 ft of stacked oil potential. The combination of the two companies will create a 75-mile-wide corridor across Delaware basin acreage.

“By buying Anadarko, they take on a highly contiguous Delaware basin position in the Permian. Chevron ought to be able to do more with the acreage than Anadarko, which lagged behind in terms of well productivity,” WoodMac's Martin said.

“We have always considered Anadarko as having the best positioned acreage in the sweetest spot of the Permian Delaware basin,” commented Per Magnus Nysveen, Rystad Energy founding partner and head of research. The combination of Anadarko’s Permian assets with Chevron’s positions the company to emerge “the clear leader among all Permian players, both in terms of production growth and as a cost leader,” he said.

“By 2025 the merged entity will be able to produce as much 1.6 million b/d of oil from the Permian basin alone,” Nysveen said.

Chevron expects the combine to enhance its existing position in the deepwater Gulf of Mexico and extend its deepwater infrastructure network. Anadarko is a large leaseholder and producer in the deepwater gulf, with infrastructure that includes 10 operated deepwater facilities. The company’s newest spar facilities, Lucius and Heidelberg, began production respectively in January 2015 and January 2016.

Chevron would gain a resource base in Mozambique to support growing LNG demand. Anadarko is a 26.5% owner and operator of Mozambique LNG, a 12.88 million-tonne/year LNG project expected to take final investment decision in the first half of this year (OGJ Online, Feb. 19, 2019). Plans for the onshore consists of two initial LNG trains to support Golfinho-Atum field, which lies entirely within Offshore Area 1, where the company and its partners have discovered 75 tcf of recoverable natural gas resources.

With the deal, Chevron gains access to Western Midstream Partners LP.

“Chevron has been noticeably absent in the midstream rush of the past couple of years. It now takes a 55% stake in Western Gas, which goes a long way toward fixing that,” said RT Dukes, WoodMac research director, Lower 48 oil and gas. The structure was simplified last year, “giving Chevron a vehicle to spin assets down in the future if needed,” Dukes said.

Transaction details

The 25% cash, 75% stock deal values Anadarko at $50 billion. The offer is priced at $65/share, representing a 39% premium over Anadarko’s close on Apr. 11. In aggregate, upon closing, Chevron will issue some 200 million shares of stock and pay about $8 billion in cash. Chevron will also assume estimated net debt of $15 billion.

The transaction is expected to generate annual run-rate synergies of $2 billion and will be accretive to free cash flow and earnings one year after close, said Michael Wirth, Chevron chairman and chief executive officer.

Using the deal size as a marker, RBC analyst Scott Hanold sees synergies moving upward to $4-5 billion “as the portfolios get rationalized and priorities are clarified,” subject to “the success of Chevron’s asset sales program, which has now been upgraded from $5-10 billion over 2018-20, to $15-20 billion over 2020-22.

“Looking through the lens of assets with limited growth potential,” he said, Chevron could divest assets in Canada, Colombia, Azerbaijan, and select parts of its Asian portfolio.

The transaction, approved by both companies’ boards, is expected to close in the second half of this year, subject to Anadarko shareholder approval, regulatory approvals, and other customary closing conditions.

Upon closing, the combine will be led by Michael Wirth as chairman and chief executive officer and remain headquartered in San Ramon, Calif.

Contact Mikaila Adams at [email protected].