By John Benny and Jennifer Hiller
(Reuters) - Chevron Corp (NYSE:CVX) on Friday said it will buy oil and gas producer Anadarko Petroleum Corp (NYSE:APC) for $33 billion in cash and stock in a deal that doubles down on its bet on U.S. shale and LNG as U.S. energy production is shattering records.
The deal makes Chevron the second-largest major by crude production, behind Exxon Mobil Corp (NYSE:XOM), up from fourth. It expands Chevron's reach 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," said Roy Martin, senior analyst at consultants Wood Mackenzie. "The acquisition makes the majors’ peer group much more polarized. Exxon Mobil, Chevron, Shell (LON:RDSa) and BP (LON: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.
The combined companies are expected to produce more than 1.6 million barrels of oil equivalent per day (boepd) in the United States this year, according to Wood Mackenzie.
Chevron's pledge to restrain expenditures has make it a favorite among energy stocks, with its shares up 13.8 percent this year. It plans to sell some $15 billion in assets over time to offset the Anadarko deal. Still, investors sent Chevron shares down 4.8 percent to $120 on Friday afternoon.
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. "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 (NYSE:APA), which also has extensive acreage in the Permian Basin, rose 2 percent, while Pioneer Natural Resources (NYSE:PXD) Co jumped 10 percent.
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," said Rystad Energy head of analysis Per Magnus Nysveen, noting that Anadarko's acreage is in the "sweetest spot" of the Permian's Delaware Basin.
Permian producers are pumping around 4 million barrels per day (bpd) currently, and is expected to hit 5.4 million bpd by 2023, according to IHS Markit, more than the total production of any OPEC country other than Saudi Arabia.
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.
Shares of Anadarko surged 32 percent 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 percent stock and 25 percent cash. The deal includes taking on $15 billion of Anadarko's debt.
As of Thursday's close, Chevron shares had gained 25 percent over the last two years, while Anadarko's stock had dropped 23 percent. In that time, U.S. crude oil prices have risen 20 percent.
"This deal seems perfect. Oil is on a rebound yet Anadarko's stock price has been stagnant," said Chris Widell, CEO of Sponte Resources, a Dallas, Texas-based private exploration and production company.
Occidental Petroleum Corp (NYSE:OXY), another company with assets in the Permian, bid more than $70 per share for Anadarko and is now considering options, sources said.
MAJORS CLAIMING SHALE
Chevron, Exxon, Royal Dutch Shell Plc and BP Plc largely missed out on the first phase of the shale bonanza, when more nimble independent producers such as Anadarko pioneered shale drilling technology and leased Permian acreage on the cheap.
However, those majors have stepped up shale acquisitions to tap the fast returns available from these fields. Analysts have been predicting another wave of consolidation as smaller shale producers react to the majors' advance.
Chevron said the deal would add to its free cash flow and profit one year after closing, if Brent crude, currently around $70, holds above $60 per barrel. It also said it plans to raise annual share buybacks to $5 billion from $4 billion when the deal closes, and to sell $15 billion to $20 billion of assets between 2020 and 2022.
The enterprise value of deal is $50 billion..
Anadarko shareholders will receive 0.3869 shares of Chevron and $16.25 in cash for each Anadarko share.
Wirth will lead the combined company after the deal closes. Chevron will remain headquartered in San Ramon, California.
Credit Suisse (SIX:CSGN) Securities (USA) LLC is Chevron's financial adviser, while Paul, Weiss, Rifkind, Wharton & Garrison LLP is its legal adviser.
Evercore and Goldman Sachs (NYSE:GS) are financial advisers to Anadarko, while Wachtell, Lipton, Rosen & Katz and Vinson & Elkins LLP are its legal advisers.