Chevron doubles down bet on U.S. shale to the tune of $33 billion
April 12, 2019
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Chevron Corp on Friday said it will buy oil and gas producer Anadarko Petroleum Corp for $33 billion in cash and stock in a deal that doubles down on its bet on U.S. shale and propels the company into the ranks of the world’s “supermajor” crude producers.
The deal makes Chevron the second-largest major by crude production, behind Exxon Mobil Corp, up from fourth. It expands Chevron’s role in two areas where U.S. energy output is surging – shale from the Permian Basin of west Texas and New Mexico, and liquefied natural gas (LNG) – which have helped make the U.S. one of the world’s largest energy exporters.
“Chevron now joins the ranks of the UltraMajors – and the big three becomes the big four,” Roy Martin, senior analyst at consultants Wood Mackenzie, told Reuters. “The acquisition makes the majors’ peer group much more polarized. Exxon Mobil, Chevron, Shell and BP are now in a league of their own.”
U.S. crude production stands at a record 12 million barrels a day (bpd), and the nation is the third-largest producer of LNG, the super-cooled fuel that is seeing record demand as a cheaper, cleaner alternative for countries that still rely heavily on coal for power generation.
Chevron’s pledge to restrain expenditures has make it a favourite among energy stocks, with its shares up 13.8 per cent this year. It plans to sell some $15 billion in assets over time to offset the Anadarko deal. Still, investors sent Chevron shares down 5.2 per cent to $119.44 on Friday.
Chevron Chief Executive Mike Wirth called the deal a “great fit” for the company. “This is really about creating shareholder value,” Wirth said in an interview with Reuters. “It’s a great combination. That’s what drives this.”
The deal is the oil industry’s largest since Royal Dutch Shell bought BG Group in 2016, and it sparked speculation that other shale producers are in play. Shares of Apache Corp, which also has extensive acreage in the Permian Basin, rose 1.8 per cent, while Pioneer Natural Resources Co jumped nine per cent.
With oil prices surging this year, Chevron and larger rival Exxon Mobil have been increasing investment in the Permian Basin, the most prolific shale oil field in the country.
Their efforts coincide with a pullback by the smaller companies that revolutionized the industry through advances in horizontal drilling and hydraulic fracking. They have had to curtail spending due to investor dissatisfaction with weak returns.
Chevron, which already has 2.3 million acres in the Permian Basin, said the Anadarko deal would give the combined company a 75-mile (120-km)-wide corridor across the Permian’s Delaware basin, on the Texas-New Mexico border.
“We will now see Chevron emerging as the clear leader among all Permian players, both in terms of production growth and as a cost leader,” Rystad Energy head of analysis Per Magnus Nysveen told Reuters, noting that Anadarko’s acreage is in the “sweetest spot” of the Permian’s Delaware Basin.
Anadarko also has a Mozambique LNG project, part of one of the industry’s largest planned current investments, which Wirth said he still expects to move to final approval “sooner rather than later” this year. Expenses from that project are expected to reach $4 billion over several years.
The tie-up with Anadarko adds to Chevron’s deepwater investments in the Gulf of Mexico and gives it a stake in growing oil and gas production in the U.S. Rocky Mountains in Colorado.
At the end of 2018, Exxon and Chevron accounted for about one-fifth of Permian output, where producers pump around four million barrels per day (bpd) currently. IHS Markit expects it to hit 5.4 million bpd in 2023, more than the total production of any OPEC country other than Saudi Arabia.
“It will be a continuous shift toward larger companies in basically all segments of the shale industry,” Artem Abramov, head of shale research for Rystad Energy, told Reuters.
Shares of Anadarko surged 32 per cent Friday morning, reflecting the 39 percent premium offered by Chevron compared to Thursday’s closing market price. The $65 per share offer was structured as 75 per cent stock and 25 per cent cash. The deal includes taking on $15 billion of Anadarko’s debt.