It finally happened. After years of speculation, independent E&P firm Anadarko (NYSE:APC) finally caught a buyout bid. As expected, it was from one of the super-majors. Chevron (NYSE:CVX) took the plunge and offered to buyout APC in the sixth-largest oil and gas deal ever. Some analysts questioned what took so long and why now.
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But investors in Chevron stock should be smiling from ear to ear.
For CVX, Anadarko offers the chance to boost several core drilling areas, instantly boost production as well as offer plenty of future synergies. A deal of APC was a long time coming and it was 100% worth the wait for Chevron.
Chevron Stock Scores Big With Anadarko
Anadarko belongs to sort of weird class of energy stock. It’s an independent oil and gas firm, meaning it operates in the upstream sector of the marketplace and makes its money by physically drilling for oil. The problem for APC has long been that it’s massive. It’s seriously one of, if not the largest independent E&P firm out there. Most E&P are small or mid-cap companies. This end of the market-cap/size spectrum makes it easy to grow production/earnings. But when you’re as large as APC, that proposition becomes a bit harder.
As a result, Anadarko has struggled since 2014 when oil crashed. It was never really able to move the needle enough to make a real bang with its profits or earnings potential. But it certainly tried and built upon its already world-class asset base.
And that is why Chevron is willing to fork over $33 billion — a 39% premium — for APC shares. For that purchase price, CVX is actually getting one heck of a deal and it allows it to score on several fronts. The biggest of which starts with the letter “P.”
The Permian Basin has become the hotbed of drilling activity in the U.S. and it’s easy to understand why. The geology is very rich and bodes itself to horizontal drilling. High production values and low-costs have made it the spot for anybody looking to benefit from shale drilling. These days, shale is more about scale of operations to drive costs even lower. Both Anadarko and Chevron have been very active in the Permian and the deal will connect their acreage together. All in all, by buying APC, CVX will have over 1,400,000 net acres in the rich Permian.
Chevron plans on exploiting that connection through new drilling technology and digital analysis to score even more oil production. The best part is, CVX anticipates saving about a $1 billion in costs per year by leveraging this greater scale in the Permian.
In addition to those assets, CVX will score around 400,000 acres in the Niobrara/DJ Basin in Colorado. The Niobrara is quickly emerging as a top place for shale drillers to score cheap oil/naturals gas. APC is the leading producer in the region and Chevron will add instant production here.
Chevron Scores Big Offshore Too
The next win for CVX in the buyout comes offshore. Anadarko has long been one of the Gulf of Mexico’s superstars and features several deep-water fields and wells. Adding APC to its mix, Chevron will now have 16 deep-water hubs in the Gulf — with many within a 30-mile radius of each other. This is significant as it allows CVX to capitalize on so-called tie-backs and link fields together via existing underwater hubs rather than building new offshore infrastructure.
As if that wasn’t good enough, CVX scores some major offshore points with its LNG ambitions. Already, Chevron has become a leader in liquefied natural gas. With APC, the energy major now has a huge source to fill those shipments. Back in 2010, APC discovered around 75 trillion cubic feet of natural gas in Mozambique’s waters and is quickly gaining customers for this venture. Thanks to Chevron’s expertise in this area, APC’s Mozambique assets are almost plug and play for the integrated energy giant.
Chevron Raises the Bar
For Chevron, buying Anadarko is a no-brainer. The best part could the actual timing of the deal. Like many of the integrated giants, CVX has seen production dip over the last few years. That’s a problem when oil prices are rising as they are now. With the APC buy, Chevron instantly moves the needle today and it has the potential to keep growing in the future. That’s very important.
The beauty is that APC hasn’t been surging on rising oil prices as, again, it was suffering under its immense size. Shares of the firm are down about 30% from its peak. CVX actually bought at a huge discount to what APC might actually be worth.
Clearly, it outs CVX in the driver’s seat when it comes to the major energy stocks. It also sets up an interesting situation for rivals like Exxon (NYSE:XOM) and BP (NYSE:BP). Like CVX, XOM and BP have seen production stagnate in recent years. With the APC buy, Chevron quickly vaults into the leadership spot. They’ll be forced to make deals on their own.
In the end, Chevron has smartly bought its way into some great assets that it can use to strengthen production profits and cash flows further. That instantly makes Chevron stock one of the best large energy stocks out there and investors should be pleased.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
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