Chevron moves to buy Anadarko in $33 billion stock and cash deal

U.S. oil major Chevron has entered into a definitive agreement with Anadarko Petroleum Corporation to acquire all of the outstanding shares of Anadarko in a stock and cash transaction valued at $33 billion, or $65 per share.

Based on Chevron’s closing price on April 11, 2019, and under the terms of the agreement, Anadarko shareholders will receive 0.3869 shares of Chevron and $16.25 in cash for each Anadarko share. The total enterprise value of the transaction is $50 billion, Chevron said on Friday.

According to Chevron, the acquisition of Anadarko will significantly enhance Chevron’s  Upstream portfolio and further strengthen its positions in large, attractive shale, deepwater and natural gas resource basins.

Furthermore, Chevron noted that Western Midstream Partners, LP is a successful midstream company whose assets are well aligned with the combined companies’ upstream positions, which should further enhance their economics and execution capabilities.

“This transaction builds strength on strength for Chevron,” said Chevron’s Chairman and CEO Michael Wirth.

“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. It creates attractive growth opportunities in areas that play to Chevron’s operational strengths and underscores our commitment to short-cycle, higher-return investments.”

“This transaction will unlock significant value for shareholders, generating anticipated annual run-rate synergies of approximately $2 billion, and will be accretive to free cash flow and earnings one year after close,” Wirth concluded.

“The strategic combination of Chevron and Anadarko will form a stronger and better company with world-class assets, people and opportunities,” said Anadarko Chairman and CEO Al Walker.

Walker added: “I have tremendous respect for Mike and his leadership team and believe Chevron’s strategy, scale, and operational capabilities will further accelerate the value of Anadarko’s assets.”

Anadarko strategic fit 

According to Chevron, the benefits of acquiring Anadarko include the fact that Anadarko’s assets will enhance Chevron’s portfolio across a diverse set of asset classes, including Shale & Tight, Deepwater, and LNG.

In the first category, the combination of the two companies will create a 75-mile-wide corridor across the most attractive acreage in the Delaware basin, extending Chevron’s position as a producer in the Permian.

In the Deepwater section, the combination will enhance Chevron’s existing high-margin position in the deepwater Gulf of Mexico(GOM) and extend its deepwater infrastructure network.

In the LNG category, Chevron will gain another world-class resource base in Mozambique to support growing LNG demand. Area 1 is a very cost-competitive and well-prepared greenfield project close to major markets, Chevron explained.

Other benefits of the deal for Chevron include the fact that the transaction is expected to achieve run-rate cost synergies of $1 billion before tax and capital spending reductions of $1 billion within a year of closing.

Chevron expects the transaction to be accretive to free cash flow and earnings per share one year after closing, at $60 Brent.

Chevron plans to divest $15 to $20 billion of assets between 2020 and 2022. The proceeds will be used to further reduce debt and return additional cash to shareholders.

As a result of higher expected free cash flow, Chevron plans to increase its share repurchase rate from $4 billion to $5 billion per year upon closing the transaction.

Details of the deal 

The acquisition consideration is structured as 75 percent stock and 25 percent cash, providing an overall value of $65 per share based on the closing price of Chevron stock on April 11, 2019. In aggregate, upon closing of the transaction, Chevron will issue approximately 200 million shares of stock and pay approximately $8 billion in cash. Chevron will also assume an estimated net debt of $15 billion. The total enterprise value of $50 billion includes the assumption of net debt and book value of non-controlling interest.

The transaction has been approved by the boards of directors of both companies and is expected to close in the second half of the year. The acquisition is subject to Anadarko shareholder approval. It is also subject to regulatory approvals and other customary closing conditions.

Upon closing, the company will continue to be led by Michael Wirth as Chairman and CEO. Chevron will remain headquartered in San Ramon, California.

‘Biggest upstream deal since Shell and BG’

Commenting on Chevron’s acquisition of Anadarko, Roy Martin, senior analyst, corporate analysis at Wood Mackenzie, said: “This is the biggest upstream deal since Shell and BG in 2015.

“Chevron now joins the ranks of the UltraMajors – and the big three becomes the big four.”

Once the deal closes, Chevron will be the second-largest producing major, in 2019 terms. It was fourth, according to WoodMac.

Martin added: “The acquisition makes the Majors’ peer group much more polarized. ExxonMobil, Chevron, Shell, and BP are now in a league of their own.

“The deal plays to Chevron’s strengths, which are tight oil and LNG,” he said. “On top of this, it diversifies their growth options, while also giving them more in tight oil.

“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. Chevron’s deepwater Gulf of Mexico position is also strengthened.”

Frank Harris, Wood Mackenzie vice president, LNG consulting, said: “We do not expect the deal to have any near-term impact on the Mozambique LNG project, as Anadarko has indicated that FID is imminent. However, Mozambique offers attractive long-term growth and diversification opportunities for Chevron’s LNG portfolio.”

RT Dukes, research director, Lower 48 oil and gas, added: “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.

“Also, APC Western’s structure was simplified at the end of last year, giving Chevron a vehicle to spin assets down in the future if needed.”

The deal will also see Chevron assert itself even more as the leader in low-royalty assets in the US Lower 48, said Lower 48 research director Robert Clarke.

He added: “Chevron should truly outperform on cash flow and payback metrics for tight oil.”

In recent mergers and acquisitions news in the services sector, offshore drillers Ensco and Rowan completed their previously announced merger deal, creating a new company named Ensco Rowan. Ensco Rowan is now the world’s largest offshore drilling company by fleet size.