StockBeat - Chevron's $33B Deal for Anadarko Fires up Merger Fever in Energy

Giant oil companies like Chevon have been searching for new sources of energy that introduce less carbon dioxide into the atmosphere

"Chevron now joins the ranks of the ultramajors", Roy Martin, an analyst at Wood Mackenzie Ltd., said in a note. Importantly, the acquisition is expected to catapult Chevron to the big league - consisting of ExxonMobil XOM and Royal Dutch Shell - as far as cash flow is concerned. This is cheaper and produces oil more quickly than costlier offshore and LNG projects that take years to generate cash.

Booming production in that region, powered by a revolution in technology that opened access to shale and other difficult-to-access formations, has turned the USA into an oil-exporting nation. It's also a major producer in the Gulf of Mexico.

-Chevron said the combined entity would have had daily output of 3.596 million barrels equivalent of oil a year ago, compared with Shell's 3.666 million.

Chevron chief executive Mike Wirth said the deal "builds strength on strength for Chevron".

Other institutional investors and hedge funds have also made changes to their positions in the company.

Chevron also said it plans to divest $15 billion to $20 billion of assets between 2020 and 2022.

Anadarko shares surged 32.0 per cent to US$61.78, while Chevron fell 4.9 per cent to US$119.76.

The $65 per share offer was structured as 75% stock and 25% cash.

An increase in share buybacks from $4 billion to $5 billion per year. In that time, USA crude oil prices have risen 20 percent.

It is the largest oil and gas deal since Shell bought BG Group in 2015. Shares of Noble Energy rose 7 percent, while Pioneer Natural Resources Co jumped more than 11 percent.

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With oil prices surging this year, Chevron and larger rival ExxonMobil have been increasing investment in the Permian Basin, the most prolific shale oil field in the country. The company is bringing industrial scale to shale drilling, once the domain of small, independent wildcatters.

Chevron, which already has 2.3 million acres in the Permian Basin, said the combined company would have a 75-mile (120-km)-wide corridor across the Permian's DE basin, on the Texas-New Mexico border.

The energy firm said the addition of Anadarko's portfolio, which primarily focusses on the Gulf of Mexico and onshore shale in the USA, will "significantly enhance" its own. "Chevron is taking advantage of that", Flynn said.

Like other US explorers, Anadarko had been punished by investors for participating in a shale boom that has delivered record crude production but little in the way of cash returns. But in general, Flynn said he expects positive things.

Oil giant Chevron will swallow its smaller rival Anadarko in a milestone deal for the U.S. energy industry worth $50bn (£38bn).

"This deal seems flawless".

Expanding Shale Operations Further: Anadarko is the biggest upstream player in Colorado's DJ Basin and has attractive assets in the Delaware Basin in Texas.

The acquisition is however subject to Anadarko shareholder approval and regulatory approvals and other customary closing conditions. Chevron said it delivers $2bn in anticipated annual operating cost and capital synergies and will be accretive to free cash flow and earnings one year after close. The enterprise value of the deal is $50 billion.

Based on Chevron's closing price on Thursday, and under the terms of the agreement, Anadarko shareholders will receive 0.3869 shares of Chevron and 16.25 dollars in cash for each Anadarko share.

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