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Add $8 Billion to Oxy's Cost for Anadarko

Liam Denning
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Add $8 Billion to Oxy's Cost for Anadarko

Add $8 Billion to Oxy's Cost for Anadarko

(Bloomberg Opinion) -- Occidental Petroleum Corp. is paying you a lot to stick around.

At close to 6%, the recent victor in the Anadarko wars sports its highest dividend yield in more than 16 years – more than in the energy-sector panic of early 2016 or the financial crisis. That is also roughly 2.5 percentage points higher than the average for its peers. To be fair, Oxy’s yield has been higher than average for years. But things have definitely changed since that battle for Anadarko Petroleum Corp. got going.

Besting Chevron Corp. was a big score for Oxy’s M&A crew (and corporate jet department) but has, up to this point, been a disaster for valuation. Oxy is easily the worst-performing large-cap U.S. oil stock this year; “easily” because it’s down while all the others are up(1). The trouble began when Chevron and Anadarko announced an agreed deal and news of Oxy’s interest began to leak out immediately. Its stock was hit harder than Chevron’s even before a formal hostile offer surfaced. Since the close of April 11, just before the drama began, Oxy has lagged the Energy Select Sector SPDR ETF by 16.1 percentage points.

That underperformance represents $8.1 billion of value up in smoke; a figure thrown into even sharper relief when you consider Oxy is touting a punchy synergies estimate of $3.5 billion a year. Oxy had to stretch enormously to beat out much-bigger Chevron, resorting to taking $10 billion in financing from Warren Buffett’s Berkshire Hathaway Inc. and, in taking on a lot of debt, banking on the oil market to help it quickly delever. Given the former specializes in corporate payday loans and the latter specializes in upending expectations, this engenders some nervousness. Plus, Oxy was known as a low-leverage, healthy dividend stock (see above) and suddenly ditched that for a “generational” deal – nimbly dodging a shareholder vote in the process. In contrast, Chevron has outperformed the sector to the tune of $3.6 billion, and all after it walked.

Oxy joins a select(?) club of big deal-makers in shale since the value-over-volume mantra really took hold in E&P investing circles. As clubs go, this isn’t one for which you would line up for hours to get into.

Every transaction has its own foibles, and these deals happened at different times, so the performances aren’t strictly comparable. But it seems clear enough investors aren’t exactly just reading the blurb and saying “congratulations on the deal.” Encana Corp. and Chesapeake Energy Corp., in particular, have been flogged for their perceived lack of discipline and confused messaging.

The one that sticks out there is Diamondback Energy Inc.’s acquisition of Energen Corp., which closed in November. Diamondback’s stock did actually drop sharply when that deal was announced, and lagged the sector through the rest of 2018. That it closed the gap and pulled ahead likely owes much to several factors, says Dan Pickering, CIO at Tudor, Pickering, Holt & Co., a boutique energy bank. One is the relative simplicity of the deal itself, merging two portfolios in the Permian basin. Another is Diamondback’s existing reputation for doing deals and integrating them well, as borne out by continued improvement in cost-efficiency and the recent announcement of a $2 billion buyback program.

There are a few things Oxy might take away from this. First, its deal might be centered on Permian shale, but Anadarko’s far-flung portfolio makes this a complex undertaking, requiring a large disposals program to work. On that front, its deal with Total SA for Anadarko’s African assets was a good move, but there’s more to do. Second, Oxy’s deal is mostly cash (Diamondback’s was all equity), which raises the risks involved and, given the strain on the balance sheet, means there’s little prospect of big buybacks materializing soon. 

Oxy’s underperformance appears to have stabilized in the past few days. Stabilizing isn’t the same as catching up, though, and that 6% dividend yield may well be taking the strain for a while. As shale’s other winners of recent vintage can attest, getting on the podium is only the first step. There’s a lot to prove before the real trophy is within your grasp.

(1) All data in this piece arecalculated as at the end of the trading day on May 21, 2019.

To contact the author of this story: Liam Denning at ldenning1@bloomberg.net

To contact the editor responsible for this story: Mark Gongloff at mgongloff1@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal's Heard on the Street column and wrote for the Financial Times' Lex column. He was also an investment banker.

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