Morningstar | Potential Sale of Anadarko’s Africa Assets Lifts Occidental Petroleum's Fair Value Estimate. See Updated Analyst Note from 07 May 2019
Although the improved proposal to acquire Anadarko Petroleum overshadowed Occidental Petroleum’s standalone performance during the first quarter, the firm delivered impressive results nonetheless--production in the period was above the high end of guidance at 719 mboe/d. This was 3% higher sequentially and 18% higher year over year. Likewise, the firm’s financial results were better than expected, with adjusted EBITDA and adjusted earnings per share coming in at $2.00 billion and $0.84, respectively (consensus estimates were $1.89 billion and $0.71).Anadarko’s management team has now confirmed that Occidental’s bid for the company is superior to Chevron’s, and is awaiting a response from the latter. The total consideration offered by Occidental was unchanged at $76 per share in the revised bid, announced May 5. However, the cash portion has been ratcheted to $59 per share, offering reduced uncertainty to Anadarko shareholders and circumventing the requirement for Occidental to hold a shareholder vote of its own before moving forward (a key driver in the decision of Anadarko to initially accept the Chevron instead, despite its lower value--$62 per share based on May 6 closing prices).
In order to fund the increased cash component of the deal Occidental has arranged to sell Anadarko’s Africa properties to Total for $8.8 billion before taxes and will issue $10 billion in preferred shares to Berkshire Hathaway. As this outweighs the value of these assets in our sum of the parts valuation, we have increased our fair value estimate for Occidental shares to $66 per share. After this reshuffling the pro-forma consolidated net debt to EBITDA ratio for Occidental would be 2.7 times, which is manageable but way above management’s comfort zone. If the deal is consummated, share buybacks will be on hand until management’s target of 2 times net debt to EBITDA is achieved.
Occidental Petroleum has three reporting segments: oil and gas, which explores for, develops and produces oil and condensate, natural gas liquids (NGL) and natural gas; chemical, which mainly manufactures and markets basic chemicals (chlorine, caustic soda, chlorinated organics, potassium chemicals, ethylene dichloride, chlorinated isocyanurates, sodium silicates and calcium chloride) and vinyls (vinyl chloride monomer, polyvinyl chloride and ethylene); and marketing and midstream, which purchases, markets, gathers, processes, transports and stores oil, condensate, NGL, natural gas, carbon dioxide and power.
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