The ongoing tussle for Anadarko Petroleum (NYSE:APC) saw another twist on Tuesday (30 April) after billionaire investor Warren Buffett entered the fray on the side of Occidental Petroleum (NYSE:OXY). Via his investing company Berkshire Hathaway (NYSE:BRK.A), Buffett said he'd invest $10 billion in Occidental contingent upon the success of its hostile bid for Anadarko, which had initially agreed to be bought out by oil major Chevron (NYSE:CVX).
It all began on April 12, after Chevron's $33 billion bid for Anadarko was accepted by the company. At the time, Anadarko was rumored to be in talks with Occidental, only for Wall Street to be greeted by the news of Chevron's successful bid. What seemed like a done deal was rocked again on April 24 after Vicki Hollub, Occidental's Chief Executive, unveiled her fourth attempt to acquire Anadarko for $38 billion.
The devil is in the audacious detail. Hollub's company has offered to pay around 17% more than what Chevron agreed to pay for Anadarko, i.e. $76 per share in cash and stock. With the assumption of Anadarko's debt, the offer appears to be worth $57 billion; around 20% more than Chevron's offer.
There could be yet more twists in this saga. It is gripping the oil market that hasn't seen a big ticket bidding war unfold between majors in recent years. The sector's three biggest takeovers – ConocoPhillips and Burlington, ExxonMobil and XTO Energy, and more recently Royal Dutch Shell and BG – were inked without much drama.
The fight for Anadarko, should Chevron choose to escalate it, is at least monetarily in its favor. It is the second-largest American oil company, second only to ExxonMobil (NYSE:XOM), and 10th on the global roster of international oil and gas producers in volume terms. In terms of market capitalization, at Monday's (April 29) close, Chevron remained five times bigger than Occidental, regardless of Buffett's endorsement.
At the heart of this somewhat unequal tussle is the dominance of the Permian Basin which is well and truly witnessing a watershed moment. The largest oilfield in the U.S. spans portions of West Texas and Southeast New Mexico; an area that is now being increasingly eyed by the oil majors.
Anadarko's 250,000 net acres in the Permian would sit happily alongside the 2.2 million net acres Chevron holds across the basin, but Occidental wants them to expand its portfolio too and for a reason. Roughly a third of all total U.S. oil production, currently just short of 12 million barrels per day (bpd), comes from the Permian. Not just Chevron; ExxonMobil, Royal Dutch Shell and BP have all invested in it over the last five years.
Potential for the export of oil produced in the Permian via ports in the Gulf of Mexico is likely to be upped at least three times over to 7-8 million bpd, once 10 pipeline construction and expansion projects are completed by the second quarter of 2020.
Currently, 110 independents run over 400 rigs in the Permian, many with distressed balance sheets, leaving Big Oil with no shortage of potential targets. Obviously, bigger Permian pure-play independents such as Concho Resources (NYSE:CXO), Diamondback Energy (NASDAQ:FANG), Endeavor Energy Resources, (privately held), Parsley Energy (NYSE:PE) and Pioneer Natural Resources (NYSE:PXD) could be potential bid targets.
There is also an outside chance, Shell or ExxonMobil might yet enter the fray for Anadarko as well. And many on Wall Street believe Occidental's eagerness to acquire Anadarko could well have to do with protecting its own house as an independent, given its impressive Permian portfolio could make it an attractive target for a bigger rival. One thing is clear – Big Oil's race for acreage within the Permian and shale plays beyond is now glaringly visible and that quest is only just beginning.
Date: May 1, 2019