Occidental Petroleum Corp. has swooped in with a US$38-billion offer for rival independent oil producer Anadarko Petroleum Corp., besting a friendly deal with Chevron Corp. and setting the stage for a potential high-stakes bidding war in U.S. shale.
The cash-and-stock offer from Houston-based Occidental would be the richest oil-industry takeover in four years, and shows the imperative among the sector’s largest players to grab larger chunks of the Permian shale basin in Texas and New Mexico, site of a spending boom. Chevron and Anadarko announced their US$33-billion agreement on April 12.
Occidental is already the largest Permian producer, and with the addition of Anadarko’s holdings, it would produce more than half a million barrels of oil equivalent a day in the region, the company said. At the same time, its use of improving technology for drilling and completing wells will keep lowering production costs, which will allow Occidental to limit capital spending.
“We feel very confident we’re going to be able to achieve value add for our shareholders. And there is no risk to this asset, we see no risk in this, and that’s what we want to be able to communicate,” chief executive officer Vicki Hollub said in a conference call.
All told, combined output from global operations would average 1.4 million barrels of oil equivalent a day, the company said. That compares with four million from industry leader Exxon Mobil Corp. and 3.1 million from Chevron.
“The deal underscores Occidental’s need to scale up in the Permian basin. If the deal goes through, it would give the company Exxon Mobil or Chevron-like Permian scale, and set them up to join the million barrels of oil equivalent per day Permian club in the late 2020s, according to our base case,” Zoe Sutherland, corporate analyst at Wood McKenzie, said in a research note.
Total U.S. oil production is on track to climb nearly 6 per cent to a world-leading 13.1 million barrels a day by 2020, according to the U.S. Energy Information Administration. Most of the gain will be from the Permian, where capital spending rivals that in the Alberta oil sands before the oil-price crash in 2014. Unlike the oil sands, however, payoffs do not take years.
Independent oil companies were early entrants into the play. Indeed, asset prices have soared as companies, including Canada’s Encana Corp., have rushed to snap up properties in recent years. The supermajors have been playing catch-up, as shown by Chevron’s bid to acquire Houston-based Anadarko, which also has operations in the U.S. Rockies, the Gulf of Mexico, Latin America and Africa.
Occidental is offering US$76 a share, comprising US$38 in cash and 0.6094 of one of its shares for each Anadarko share. With the assumption of Anadarko’s debt, the offer is worth US$57-billion. The bid followed two previous proposals, according to a letter Ms. Hollub sent to Anadarko’s board.
Ms. Hollub said Occidental had previously offered as much as $76 in cash and stock, as recently as April 11. “We were surprised and disappointed that your board did not engage with us on that proposal, or our proposal of April 8, even though both were significantly higher than the price you accepted from Chevron,” she wrote.
Chevron has offered US$16.25 in cash and 0.3869 of a Chevron share for each Anadarko share. When the deal was announced it was worth US$65 a share. The transaction was valued at US$50-billion with debt, although Chevron stock has since weakened. Anadarko would pay a US$1-billion break fee to Chevron if the deal falls through.
“We are confident the transaction agreed to by Chevron and Anadarko will be completed,” said Kent Robertson, a spokesman for Chevron.
Occidental says it is aiming for US$3.5-billion a year of cash flow increases, first from $2-billion in cost savings from merging the operations and from $1.5-billion of annual capital spending reductions.
For its part, Anadarko said it will review the Occidental offer and respond to investors after. “The Anadarko board has not made any determination as to whether Occidental’s proposal constitutes, or could reasonably be expected to result in, a superior proposal under the terms of the Chevron merger agreement,” the company said.