Reuters Insider - Trading at Noon: Chevron is buying Anadarko Petroleum for $33 billion

Eastern

15/04/2019 09:18

Click the following link to watch video: https://share.insider.thomsonreuters.com/link?entryId=0_lw1hqnj1&referenceId=0_lw1hqnj1&pageId=ReutersNews
Source: Reuters Insider

Description: Chevron says it is buying Anadarko Petroleum for $33 billion to
boost its U.S. oil and gas operations. We examine the deal and discuss what
other companies could get sold next. Plus, strong results push JP Morgan
Chase's shares higher.
Short Link: https://reut.rs/2XcF0Ix

Video Transcript:

Welcome to Trading at Noon. I am Leah Duncan. A big deal in the energy sector
today- Chevron has agreed to buy Anadarko Petroleum for $33 billion in cash
and stock. The deal makes Chevron the second largest major light crude
production behind ExxonMobil. Its shares are falling 5% on that merger
announcement this morning, and Anadarko jumping 32% but still trading below
the $65 offer price. Reuters Correspondent David French is in studio with me
today. David, you've been tracking the developments around this deal. A lot of
analysts have been calling for M&A consolidation to happen in this space for
some time now. Break down exactly what Chevron gets in this deal. 

Okay. Well, Chevron primarily gets a pretty healthy spread of assets in some
pretty attractive places, primarily, the Permian Basin of West Texas and
Eastern New Mexico, the heart of the US shale revolution. They get a nice
piece there. They also get a very attractive LNG asset in Mozambique, which is
well-talked about. And they've got some other good places as well. Anadarko is
in a number of different places in the US and around the world, so obviously
kind of, yeah, Chevron as well. It can help match with some of their assets as
well. One of the more interesting places which Anadarko is in which Chevron
currently isn't is Colorado in the DJ Basin. There's been a lot of uncertainty
around the oil and gas industry in Colorado recently, given some of the
political winds around, what's called the "setback issue", where people can
drill for oil and gas in Colorado. So it's interesting that Chevron is taking
a position in a company which has that Colorado position at this time. So
we'll see how that all shakes out, both from political perspective and also
from Chevron's. 

Chevron was not the only bidder for Anadarko. 

That's right. 

Occidental also bid as well. Why did Anadarko go with Chevron? 

Well, if you look at Chevron and Occidental, they're both well-known names,
but Chevron is much bigger. So the deal which Chevron and Anadarko struck,
it's 75% stock and 25% cash. If OXY had done it, it would have been a much
larger stock component. Anadarko and OXY are kind of similar in – or much
closer, should I say, in terms of their size, so therefore it would have been
a lot more dilution for OXY's stock. Anadarko is getting like more value- or
it feels it's getting more value by tying up with Chevron than it would do
with OXY. 

But we are seeing Chevron shares down about 5% today, David. 

Whenever there's a deal where a stock component is involved, shareholders
might take a little time to digest that. They're also going to get diluted in
a little way, but obviously the hope is that in the long term, the value that
this deal will create will be beneficial. If it was considered a bad deal,
then Chevron would have perhaps been down a lot more than it is right now. But
still a little off, but it should be okay. 

Oil prices no doubt a big tailwind for these major oil companies. Oil prices
have been up by about a third so far this year. How dependent is Chevron on
the oil price do you think to make this combination successful? 

Actually, one of the most interesting things about the oil price and this kind
of consolidation is actually the, whilst oil prices have risen a fair amount,
company valuations haven't risen at the same clip, so therefore, companies are
actually considered a better investment than they perhaps would have been if
considered undervalued in many ways. So Chevron is actually taking a position
now thinking perhaps, okay, oil prices have gone up, so we're feeling a little
more buoyant about what we're going to be able to do, the cash we're going to
be able to generate from producing oil and gas, but the valuations of our
competitors, of our potential acquisition targets haven't risen, so the time
is right now to go out, make that deal, and hopefully get some good value. 

Right. And Chevron now among the top four- Exxon of course, Shell, and BP. 

Indeed, yeah. One of the most interesting aspects I guess from everyone else
is that, okay, always like the focus goes from the deal that's been announced.
Five minutes later, everyone is talking about what's going to be the next
deal. And so obviously Shell has been in the news in the last few weeks,
whether they might be looking to do a deal with a private Permian player.

They made a big deal back in 2016, right? 

Well, they made BG- but BG was very much a gas play. It was then betting that
the future of energy was going to be gas. In that time between 2016 and 2019,
it's actually gas has kind of been a little more subdued and everyone is
looking at oil, in particular Permian and shale oil. So therefore, Shell is
kind of like seen to be perhaps a little underweight in some of the key shale
place and the key oil place. And maybe they will look to do something, and as
I say, there have been rumor that they've been looking at a private Permian
player called "Endeavor". BP did a deal last year, taking some of BHP's
assets, some of those were in the Permian, so they should be okay perhaps, but
you never know they may look to do another deal. And obviously, there's always
Exxon. I know everyone would love to see, as an oil company, Exxon come along
and offer them a big premium on their share price. Exxon both- Exxon, sorry,
and Chevron have both laid out grand production ramp ups for the Permian
Basin, so that will require some additional acreage to help fulfill those
growth targets. So Exxon, again, into focus now. 

Now interestingly, Occidental of course lost out on this deal with Anadarko,
but reporting is that the company is exploring options. And we're seeing
companies such as Apache and Devon and Pioneer Natural Resources- those stocks
are all rising on hopes that potentially they could be acquired as well. 

For sure. I guess there's two things where you have like are these companies
going to be buyers or are they going to be sellers, because this kind of deal
shows that right now energy is about scale, it's about being able to produce
the most amount at the lowest possible cost, and so therefore is always going
to favor the Exxons and the Chevrons of this world, the major producers. So if
you're in that kind of like second tier or the third tier- well, they're still
a big oil company, like a $30 billion $40 billion market cap, but you just
can't compete in that same way. So they're going to have to make a decision
now. Do we double down, maybe merge with a rival to create a bigger company,
buy someone smaller to again like kind of remain independent but gets them
more scale, or do you just say thanks very much, that's me out? If Exxon comes
along with a big premium, I'm going to happily sell and many of the investors
are thinking perhaps there are some sellers there, and so therefore they're
going to try and take advantage now, buy in, and hope that Exxon will come in
later. 

Now, David, you talked some people that were involved in the deal. Anything
else they said that stood out to you? 

I guess possibly would be the fact that the assets quite fit quite well –
Chevron and Anadarko. OXY perhaps like wouldn't have been- there are other
players out there that OXY, if they were able to merge with, would probably be
a better fit. And I guess possible the most interesting thing would be kind of
is the valuations, is this aspect that I just mentioned where right now the
disconnection between the rising oil price and the lack of rise- subsequent
rise in the company valuations, that's going to create some interesting days
ahead for board executives, for investment bankers, and for reporters as well.


Alright, David, thanks so much. We'll be keeping our eyes peeled for any
potential other deals that maybe happening in this space as well. David
French, thanks so much. Alright, let's move on and check out the markets.
Stocks are higher across the board, with Disney and financials rising. Disney
is up 9%. It hit an all-time high of $130.90 after it priced its new streaming
service Disney Plus at $7 a month below Netflix. It debuts in November. Disney
expects it to be profitable within five years. The Mouse House is the top
performer in the Dow Jones Industrial Average, which is gaining 0.7%. Dow Inc.
is the second best, and the third is JPMorgan Chase. The bank posted a better
than expected quarterly profit and that calmed fears of about slowing economic
growth weighing on results. CEO Jamie Dimon said the US economy remains solid
with moderate inflation and strong consumer and business confidence. Shares
are adding 4%. And the S&P 500 rising 0.4%, led by financials. The index
topped the 2,900 level for the first time since October. Take a look there,
that chart at 2,901. The NASDAQ gaining 0.2%, with energy stocks having the
best day. Well, that wraps up Trading at Noon on this Friday. I'm Leah Duncan,
and this is Reuters