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%.

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 Andarko’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.