Report
Jeffrey Stafford
EUR 850.00 For Business Accounts Only

Morningstar | Chevron Makes Splash With Anadarko Petroleum Acquisition; FVE Unchanged

Chevron announced an agreement to acquire Anadarko Petroleum for $65 per share, consisting of 0.3869 share of Chevron and $16.25 of cash per Anadarko share. The total offer price represents an 18% premium to our $55 fair value estimate for Anadarko. With the deal, Chevron adds new positions in the DJ Basin unconventional play and an operating stake in the Mozambique liquefied natural gas project and expands its already large Gulf of Mexico and Permian footprint. Chevron expects to derive $2 billion in annual run rate synergies, split evenly between cost and capital spending, making the transaction accretive to free cash flow and EPS within a year of closing at $60/barrel Brent. It also plans to divest $15 billion-$20 billion in assets between 2020 and 2022, directing proceeds to debt reduction and cash returns to shareholders. Once the deal is closed, Chevron expects to increase its annual repurchase rate to $5 billion from $4 billion.

Strategically, the deal seems sound, as Chevron is likely to be able to integrate Anadarko’s Gulf of Mexico and Permian assets into its own and drive further efficiencies. The stake in Mozambique gives Chevron a foothold in an emerging LNG area where it lacked a presence and opens a new avenue of growth for its LNG business outside Australia. In the DJ Basin, Chevron can deploy its manufacturing model and technologies developed in the Permian to further reduce costs. We expect most of Anadarko’s other assets will be divestiture candidates.

The valuation looks fair at a relatively small premium to our Anadarko fair value estimate, not including the synergies, and reasonable resource (less than $3/barrel of oil equivalent) and earnings (6.5 times 2019 estimated EBITDA) multiples. As a result, our fair value estimate for Chevron is unchanged. While Anadarko does not earn an economic moat, we do not see its addition to the portfolio as diluting Chevron's narrow moat, given the opportunity for cost savings and operation efficiencies.
Underlying
Anadarko Petroleum Corporation

Anadarko Petroleum is an independent exploration and production company. The company also participates in the hard-minerals business through royalty arrangements. The company's reporting segments are as follows: Exploration and Production, which is engaged in the exploration, development, production, and sale of oil, natural gas, and natural-gas liquids (NGLs) and in advancing its Mozambique liquefied natural gas project toward final investment decision; and WES Midstream and Other Midstream, in which these two segments engage in gathering, processing, treating, and transporting the company and third-party oil, natural-gas, and NGL production as well as gathering and disposal of produced water.

Provider
Morningstar
Morningstar

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.

Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.

We have operations in 27 countries.

Analysts
Jeffrey Stafford

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