Chevron Should Walk Away From Anadarko Deal

Chevron is arguably the best of the integrated super-major oil companies. For the past 20 years, Chevron has delivered superior returns to shareholders, outperforming the S&P 500 for most of that period. The past five years have been an anomaly as the plunge in oil prices caused performance to lag, but Chevron still outperformed its peers during that period.

I have learned to trust Chevron’s management. However, I had some reservations about Chevron’s agreement to acquire Anadarko at a nearly 40% premium.

The deal was great for Anadarko shareholders. Analysts at Robert W. Baird recently ranked Anadarko 48 out of 50 oil producers in the Delaware portion of the Permian by average revenues per well. Baird analysts noted last month that Anadarko “has consistently ranked as one of the worst productivity per well companies in the Delaware.” The company hasn’t generated annual positive free cash flow since 2014. So Anadarko shareholders really hit the jackpot with this deal.

Chevron shareholders weren’t as thrilled with the acquisition. Since the original deal was announced, Chevron shares have shed 7%.

Occidental Petroleum had made a bid for Anadarko, but the company opted for Chevron’s offer, citing unspecified structural issues with the Occidental offer.

But Occidental didn’t give up. Anadarko shareholders still had to approve the Chevron offer. Before they could do so, Occidental sweetened the pot. The current offer from Occidental is for $59.00 in cash and 0.2934 of a share of Occidental common stock per share of Anadarko common stock. That is equal to $76.51 a share at the most recent market close, and a premium of more than 20% to Chevron’s offer. Further, the new deal doesn’t require approval by Occidental’s shareholders, as the original offer had.

Billionaire Warren Buffett jumped into the fray as well. Buffett’s Berkshire Hathaway announced that it would invest $10 billion in Occidental Petroleum to aid in sealing the deal. But Buffett’s help comes at a high price for Occidental. Berkshire Hathaway would receive 100,000 shares of preferred stock that pay a dividend of 8% a year. Occidental’s common stock yields 5.4%.

1 2 3
View single page >> |
How did you like this article? Let us know so we can better customize your reading experience. Users' ratings are only visible to themselves.

Comments

Leave a comment to automatically be entered into our contest to win a free Echo Show.
David J. Williamson 1 month ago Member's comment

Very interesting article. You've made a great case as to why #Chevron should simply walk away. But why are they so adamant about pushing forward with winning a bidding war? Are the Permian Basin properties really so valuable to Chevron?