Chevron chief executive Michael Wirth’s decision to opt out of a bidding war for Anadarko Petroleum Corp has raised the bar for deals, and dampened expectations that oil majors will drive a new wave of consolidation in U.S. shale.
Wirth last week ruled out increasing his $33 billion offer for Anadarko after being outbid by Occidental Petroleum Corp, walking away from a company he had described as a perfect match. Chevron received a $1 billion breakup fee that it will use toward share buybacks.
The decision will make rivals think twice about splurging on companies operating in the largest U.S. oil field, but will not put an end to shale deals given the weak valuations of independents, analysts said.
Even Wirth refused to rule out another deal.
“We are always scanning the landscape for opportunities,” Wirth said in an interview on Thursday.
However, Wirth added that Chevron has a “rich queue” of existing projects.
“We have no intention to do an acquisition unless it’s exceptionally good for us,” he said.
Many companies with shale assets are trading at depressed prices and would “be accretive to the larger caps or majors,” said Geoffrey King, a portfolio manager at investment firm Macquarie Group.
Price-to-earnings ratios for producers’ Carrizo Oil & Gas, Devon Energy Corp and Cimarex Energy Co are in the single digits compared to the 14 to 17 times earnings multiple that BP Plc, Chevron and Exxon Mobil Corp trade.
Weak shares prices have chilled deal-making among similar-sized oil producers. Last quarter, the value of U.S. energy deals fell to a 10-year low.
Investor reaction to the Chevron-Occidental contest for Anadarko also may cause potential for the majors to think twice before getting involved in a bidding contest.
Occidental traded on Friday at $54.97, down 9 per cent from the day it launched its bid for Anadarko and at a 10-year low. Chevron was up 3.8 per cent to $121.99 since withdrawing, but is down 5.3 per cent in the last 52 weeks.
Chevron has been a poster child for spending restraint and called the bid for Anadarko a reaction to the “industrial logic” of two companies with similar operations. It pledged to restrict annual capital spending to around $20 billion through next year to return more cash to investors.
Avoiding overspending on shale is “what shareholders have been advocating for,” said Andrew Dittmar, an M&A analyst at researcher Drillinginfo. “Chevron stock got a decent pop on a lousy day for the market.”
Despite a large acreage position and the “strongest royalty position of anybody in the Permian,” Wirth said the No. 2 U.S. oil producer this year will restrict its drilling program in the top U.S. shale patch to just 20 rigs, less than half that of rival Exxon, while aiming to reach output of 900,000 barrels per day by 2023.
The issue for Chevron and other large producers thinking of expanding in the Permian is how much more production they can wring from an asset, said Kris Nicol, head of U.S. corporate research at consultancy Wood Mackenzie.
“A lot of companies are undervalued,” Nicol said.
There is more involved to making an acquisition pay off than the purchase price. “The question is, once you get that company, what can you do with it?” Nicol asked.
Still, after years of letting small independents dominate shale, the majors have “come around” to the importance of the fields’ fast-cycle production, said Matt Sallee, portfolio manager with Tortoise Capital.
Anadarko’s agreement to be acquired by Occidental for $38 billion in cash and stock “makes it more likely that others will want to do something big to compete,” he said.