U.S. Markets close in 6 hrs 29 mins

Bull Of The Day: Anadarko (APC)

Daniel Laboe

The Deal

The bidding war for Anadarko Petroleum Corporation (APC) is ostensibly over with Chevron (CVX) unable/unwilling to match Occidental’s (OXY) $38 billion bid. Chevron walks away with a $1 billion breakup fee, which it will use to buy back stock, and Occidental walks away with Anadarko. Occidental will be acquiring APC for $59 in cash and 0.2934 a share, adding up to $74.89 a share as of close yesterday. This will represent a 2.9% premium for APC’s current shareholders if this deal goes through as planned. APC closed yesterday at $72.79.

Occidental is funding this deal with the help of Warren Buffet and his holding company Berkshire Hathaway as well as a little help from Total SA (TTFNF). Berkshire Hathaway committed to buying $10 billion in preferred stock to support the Anadarko acquisition. Total SA agreed to purchase Anadarko’s African assets for $8.8 billion which is primarily made up of liquefied natural gas. Both these deals are the contingent factors of Occidental’s acquisition of Anadarko and create some risk if one of them were to fall through.

APC has fallen 4.15% since they agreed to go with Occidental’s offer. Shareholders were hoping for a bidding war between OXY and CVX to raise the price even further. Now APC’s stock price is going to be completely correlated with both the perceived risk of the deal and OXY’s stock price. Every $3.41 change in OXY’s stock price (6% change) will have a $1 effect on APC’s shareholder compensation (1.4%) when the deal does go through.

Many of Occidental’s current stockholders are concerned that they are paying too much for Anadarko, but since the firm is issuing less than 20% of its total equity for this acquisition, it doesn’t require stockholder approval.

Occidental is paying a 19% premium for Anadarko but the synergies in the Permian Basin will make it worth it. Currently, Occidental’s Delaware Basin (part of the Permian) wells perform 74% better than Anadarko’s and spending less on each well. Occidental’s operations are superior to Anadarko’s and will increase their productivity significantly once the deal goes through.

Conclusion

I am confident that this deal will go through with funding secured from Berkshire Hathaway and Total SA’s lucrative deal. The question is when this deal will go through. I might wait to see this stock track down with the rest of the market on trade concerns and buy it at a more equitable price. Beware if this deal does not go through APC will plummet. None the less, I believe this short-term investment has a very high chance of success. APC – Zacks Rank #1 (Strong Buy).

 

Zacks' Top 10 Stocks for 2019

In addition to the stocks discussed above, would you like to know about our 10 finest buy-and-holds for the year?

Who wouldn't? Our annual Top 10s have beaten the market with amazing regularity. In 2018, while the market dropped -5.2%, the portfolio scored well into double-digits overall with individual stocks rising as high as +61.5%. And from 2012-2017, while the market boomed +126.3, Zacks' Top 10s reached an even more sensational +181.9%.

See Latest Stocks Today >>


Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
Occidental Petroleum Corporation (OXY) : Free Stock Analysis Report
 
Chevron Corporation (CVX) : Free Stock Analysis Report
 
Anadarko Petroleum Corporation (APC) : Free Stock Analysis Report
 
To read this article on Zacks.com click here.
 
Zacks Investment Research