EUR 850.00 For Business Accounts Only

Morningstar | Occidental Formally Enters Agreement to Buy Anadarko. See Updated Analyst Note from 10 May 2019

Occidental Petroleum announced May 9 that it has formally entered into an agreement to acquire Anadarko Petroleum in a deal valued at $57 billion, or $76 per share (78% cash). The announcement followed confirmation that Chevron, which had previously agreed to acquire Anadarko for $65 per share (25% cash), is not willing to increase its offer and will instead receive a $1 billion breakup fee. The terms of the Occidental agreement are consistent with the most recent bid announced by the company May 5.

The deal is a huge undertaking for Occidental, which itself has an enterprise value of about $50 billion. The cash portion will be partly financed by a $10 billion equity investment from Berkshire Hathaway, along with the proceeds from the sale of Anadarko’s Algeria, Ghana, Mozambique, and South Africa assets (which Total has already agreed to purchase for $8.8 billion before tax as soon as the Anadarko acquisition closes). Despite these arrangements, the deal will initially leave Oxy with significantly higher financial leverage, and net debt/EBITDA could approach 3 turns, which is a big step up from the current level under 1 turn. As the combined entity is expected to generate free cash flows while growing at about 5% annually, we expect the balance sheet to improve fairly quickly. In light of this, Oxy has already suspended its share-repurchase program and does not expect further repurchases or acquisitions until it brings this ratio below 2 times on a consolidated basis, which it expects to achieve by 2021. After fully incorporating this pending transaction, including the approximately $2 per share dilutive impact of the warrants associated with the Berkshire investment, our fair value estimate is $64 per share.

Our most recent valuation for Oxy as a stand-alone entity was $58 per share, indicating that the deal is adding value overall. Oxy is the leading Permian Basin producer and also one of the basin’s technical leaders, with average well performance far exceeding that of most peers. Applying its methodologies to Anadarko’s complementary position is one source of the $2 billion in run-rate synergies that Oxy has identified. In addition, as the combined firm will have a significant scale advantage, management expects more bargaining power with suppliers and a more efficient procurement and supply chain, resulting in drilling and completion costs falling about 10%. The combination will reduce corporate and overhead costs, too.

Finally, we note that Oxy expects to accelerate the deleveraging process by raising up to $6 billion via incremental divestitures in the next 12-24 months. We speculate that Anadarko’s Gulf of Mexico properties could fetch $2 billion-$3 billion, with the remainder mainly coming from the midstream segment (Oxy and Anadarko both hold substantial midstream assets in their respective portfolios, and Oxy has been actively selling its own holdings since late 2018). Anadarko’s DJ Basin isn’t a natural fit for Oxy either, but the value of that property probably exceeds $6 billion. Finding a buyer could prove challenging in light of the recent regulatory challenges the industry has faced in that area, though. Only one other firm, Noble Energy, has a large DJ Basin position and it probably has its hands full with the startup of its Leviathan natural gas project in Israel.