Chevron Should Walk Away From Anadarko Deal

I originally thought Chevron would win the bidding war for Anadarko Petroleum. But the price has gotten too high, so I would argue that it’s time for them to walk away from the deal.

Chevron and Occidental are really after Anadarko’s Permian Basin properties, and Occidental announced that it already has a deal to sell some of Anadarko’s international assets. In a press release, Occidental announced:

“In connection with Occidental’s proposal to acquire Anadarko Petroleum Corporation, it has entered into a binding agreement to sell Anadarko’s Algeria, Ghana, Mozambique and South Africa assets to Total S.A. for $8.8 billion.

The sale is contingent upon Occidental entering into and completing its proposal to acquire Anadarko, and would be expected to close simultaneously or as soon as reasonably practicable afterwards. The assets to be sold to Total represent approximately 6% of the expected net production and approximately 7% of the cash flow after capital expenditures of Occidental in 2020 pro forma for the acquisition of Anadarko.”

The proceeds of the sale would fund part of the acquisition, as would Buffett’s investment.

Both Chevron and Occidental projected multi-billion dollar synergies from the acquisition. Rystad Energy recently noted that Anadarko’s Permian wells produce less oil and gas per-foot drilled than either Chevron or Occidental. Both companies believe they can substantially improve on the performance of these wells.

Anadarko announced this week that it views the current Occidental offer as the “superior proposal.” Chevron has until the end of the day on May 10 to come back with a counteroffer or withdraw from the process.

As someone who has recommended Chevron to investors many times, I don’t want to see them get involved in a bidding war. There is no question they could outbid Occidental, but that would consume a chunk of the synergies. Further, if Anadarko walks away from the Chevron offer, they will owe Chevron a $1 billion termination fee as required by the Chevron Merger Agreement.

In a recent article, I indicated that Chevron was likely to win the bidding war for Anadarko Petroleum. However, I underestimated what Occidental was willing to pay to get this deal done. This price is now steep, so I think Chevron should walk away from the negotiating table.

It seems likely now that Occidental will prevail. I think Occidental shareholders will be the biggest losers in the deal, as they paid a steep price.

Anadarko is a clear winner. But Chevron is set to walk away with a $1 billion consolation prize. Further, Chevron shares are discounted relative to where they were before the original deal was announced. So if Occidental does win out, there is a good chance for a short-term rally for Chevron. And if Chevron still wants to make an acquisition in the Permian, there are plenty of other opportunities.

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