Why Chevron Bought Anadarko
Last week Chevron sent ripples through the oil industry by agreeing to buy Anadarko in the sixth-largest oil and gas deal in history.
Chevron agreed to pay $65 per share of Anadarko, which was a 39% premium to Anadarko’s last closing price prior to the deal’s announcement. Chevron’s outlay will be $33 billion plus assumption of Anadarko’s $17 billion debt for a total cost to Chevron of $50 billion.
Anadarko has an attractive global portfolio, but there were several synergies that made it especially attractive for Chevron. The key to this deal is the promise of the Permian Basin, which is now the world’s top oil-producing region.
As Chevron points out, the deal connects several of its existing fields to create a 75-mile-wide corridor in the Permian Basin. Connected acreage allows for drilling of longer laterals, enabling a producer to extract more oil from a well, which in turn drives down the cost per barrel.
Chevron was already one of the top acreage holders in the Permian. This acquisition boosts Chevron’s acreage by 240,000 net acres to over 1.4 million net acres in the Delaware Basin, where shale oil economics are probably the best in the country.
One additional synergy for Chevron is that they hadn’t been a major player in the midstream space, which involves the transport and storage of oil and gas. This deal gives Chevron a 55% stake in Western Midstream Partners, a publicly-traded $16 billion master limited partnership.
Western Midstream’s assets are located in the Rocky Mountains, North-central Pennsylvania and Texas. The company is engaged in the business of gathering, compressing, treating, processing, and transporting natural gas; gathering, stabilizing and transporting condensate, natural gas liquids and crude oil; and gathering and disposing of produced water. Thus, Chevron immediately gets a large presence in the midstream space.
Anadarko’s shareholders are undoubtedly pleased by the immediate 30+% surge in the price of their stock. But a number of other operators in the Permian Basin saw their share prices rise as well, in anticipation that they could also be an acquisition target.
Beyond Chevron, the largest acreage holders in the Permian Basin include Occidental, Apache, ExxonMobil, and Concho Resources. Occidental, in fact, reportedly attempted to acquire Anadarko prior to Chevron sealing the deal. But Occidental may now find themselves in the crosshairs of a bigger player looking to shore up their Permian portfolio.
Other major producers in the Permian include ConocoPhillips, EOG Resources, Pioneer Natural Resources, Noble Energy, Devon Energy, and Diamondback Energy (which acquired fellow Permian producer Energen Corporation in 2018). These companies could be targeted by the supermajors, or they could look to target smaller Permian producers like WPX Energy, Parsley Energy, or Cimarex Energy.