On Friday — a day when most U.S. oil companies dropped amid a selloff in the crude market — Anadarko extended its recent rally to close about 8% higher than the value of Chevron’s cash-and-stock proposal. That’s putting pressure on Anadarko to reconsider its merger agreement with Chevron and open itself up to higher offers in a full-blown bidding war.
Anadarko’s board must decide whether Occidental’s bid is “reasonably likely to result in a superior proposal,” according to the merger accord. With a $14-per-share gap between between the two offers, the Occidental bid may meet that standard. It also means Chevron might have to increase its offer to stay in contention, according to Morgan Stanley analyst Devin McDermott.
“We ultimately think it’s Chevron-Anadarko, even if it’s at a higher bid,” he said. Still, due to the higher risks associated with Occidental’s proposal, “we don’t think that Chevron would have to fully match” Occidental, he said.
Anadarko is one of the largest independent U.S. oil producers and has been the subject of merger speculation for some time; a takeover would be the biggest oil-related transaction in at least four years. The company’s operations span three continents but the real prize is its American assets, specifically those in the prolific Permian Basin of West Texas and New Mexico, where production is soaring and a consolidation among industry players is looming.
Should Anadarko’s board decide Occidental’s bid may be the better of the two, Chevron has four days to come back with a counter offer, according to Morgan Stanley. If Chevron then ups its price, Occidental has three days to respond with a new proposal.
A representative for Anadarko declined to comment on the board’s response. Chevron spokesman Kent Robertson declined to speculate on the company’s next steps and referred back to CEO Mike Wirth’s comments on a Friday conference call that it remains confident the transaction will be completed.
The situation poses a dilemma for Wirth: stick with his current offer and Chevron may end up losing Anadarko, which would provide the oil major with production growth well into the next decade. But stumping up more cash risks a hard-won reputation for financial discipline.
Speaking on the conference call, held to discuss the company’s first-quarter earnings report, Wirth deflected questions from analysts about his intentions and indicated the ball is firmly in Anadarko’s court. He declined to specifically answer whether he’d raise the offer, although Chief Financial Officer Pierre Breber opened the door to changing the terms of the deal.
“Clearly, we have the capacity to have alternative structures, we could put more cash in if that’s what Anadarko wants to do,” he said, noting that Anadarko’s board already signed off on the current split of 75% stock to 25% cash. Occidental is proposing a 50-50 split.
Anadarko’s shares have traded above the value of Chevron’s offer almost every day since the deal was announced on April 12. The gap stood at $11.24 at the close on Friday. That’s creating pressure from investors. New York-based investment firm D.E. Shaw has urged the company to run an open sale process, people familiar with the matter said this week.
Anadarko has said it’s evaluating the Occidental offer, but so far hasn’t commented on the relative merits of the bids. Some analysts have suggested Occidental may have been rebuffed because of concerns that its proposal was too risky, given its size, and that it would pay with its own stock, which could decline once a deal was announced.
But despite some initial warnings, Occidental’s stock hasn’t cratered. The shares are down 8.8% since its offer was first reported on April 12, compared to a 7.1% slide for Chevron.
Chevron shareholders don’t want Wirth to repeat the past mistakes of many other Big Oil executives, where he signed up for major deals that delivered lackluster returns.
“We don’t want this to turn into a bidding war where you’re matching one for one,” said Noah Barrett, an energy analyst at Janus Henderson, which manages $328 billion including Chevron, Occidental and Anadarko stock. “Ultimately you could end up with the winner’s curse.”