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The Long Story Short - The energy market is heating up like a Dothraki sword
Who will sit on the oil throne?
(Note: companies that could be impacted by the content of this article are listed at the base of the story (desktop version). This article uses third-party references to provide a bullish, bearish and balanced point of view; sources listed in the "Balanced" section)
April 12th, Chevron Corp agreed to buy Anadarko Petroleum Corp for
$50 billion including debt. The
acquisition would make Chevron as big as Exxon and Shell and double down its
position in the Permian Oil Basin, a region between western Texas and
southeastern New Mexico. Not to be
outdone, Occidental Petroleum offered Anadarko a $57 billion takeout bid
starting the first takeover battle for a major oil company in years. As expected, energy stocks have been strong
in reaction to the news. Whether or not
the acquisition is the first in a wave of consolidation remains to be
seen. Below, we discuss several
arguments for and against further industry consolidation.
The bidding war for Anadarko Petroleum is a sign that energy consolidation is heating up.
Higher oil prices support higher valuations. West Texas Intermediate oil prices closed at $42.53 on December 23, 2018. Since then, prices have risen more than 50% to a level in the mid-sixties. Higher prices not only increase the value of acquired exploration companies, they increase the cash flow of stock value of acquiring companies.
Larger companies command a premium. Majors are trading at premium prices to smaller exploration companies improving their currency for making acquisitions. Dan Pickering, CEO of Tudor, Pickering Holt & Co. believes that if there is one more transaction, there will be a big rush because both buyers and sellers will be afraid of being left out.
The economy is strong. First-quarter GDP rose at an annual rate of 3.2%, well above expectations. A strong economy supports the argument for continued strong demand for oil and the need for an expansion in drilling activity. Acquiring companies with a large portfolio of drilling prospects is the quickest way to expand drilling.
It’s all about the Permian. The Permian Basin remains the most exciting play in the world and the Anadarko acquisition strengthens this belief. Energy companies with assets in the Permian want to expand their assets, and energy companies without assets in the Permian fear being left behind if they don’t acquire such assets.
The Anadarko Petroleum acquisition is unique and simply represents a normal part of the energy cycle.
Occidental is a unique company. Occidental is a mid-sized company without the international characteristics of a major oil company, nor the purity of an independent exploration company. Its bid does not represent a revaluation of energy assets. Instead, Occidental is bidding because they are getting squeezed out. Jennifer Hiller of Reuters believes Occidental must grow or risk being acquired itself.
Chevron has a unique reason for making an acquisition. Chevron is also in a unique situation seeking to move from a smaller major oil company to a large major oil company, comparable to Exxon and Shell. Making a large acquisition is the easiest way to accomplish this goal. It is unlikely that other major oil companies will feel the need to respond to Chevron to remain competitive.
Anadarko is unique among acquirable companies. There are many exploration companies. However, few have the size needed to create an immediate impact for companies as large as Occidental or Chevron. Anadarko is in a unique situation being one of the largest exploration companies. As such, further acquisitions by major oil companies are unlikely.
The acquisition represents a contrarian investment. Energy stocks have been battered by several years of low energy prices. The involvement of a value investor like Warren Buffet is a sign that the interest is cyclical instead of a new trend. Dan Pickering says that the deals are about growing business not oil prices and believes the transactions would take place if oil was at $50 or at $70, implying that the acquisition is not necessarily a bet on rising oil prices.
Chaos is a ladder. It is hard to imagine other acquisitions the size of Anadarko simply because the number of players is limited. However, energy is an industry where participants keep a close eye on their competitors. Energy companies are most likely uncomfortable with an environment that now features larger players. Larger players will feel the need to make acquisitions to keep up. Mid-size players feel the need to make an acquisition or complete a merger of equals or face the prospect of being pushed into extinction. Smaller players see the prices being paid for their competitors and start having thoughts they might not have thought before. At the same time, small company management may be starting to worry that they will be squeezed out if larger players use their economies of scale to reduce costs.
Energy consolidation ahead?, CNBC, April 19, 2019
Visit to Omaha: Will Bershire fund Occidental Petroleum’s bid for Anadarko?, Seeking Alpha, April 30, 2019
Chevron is buying Anadarko. That would make it as big as Exxon and Shell, Los Angeles Times, April 12, 2019
Occidental offers $38 billion for Anadarko, topping Chevron, Reuters, April 24, 2019,
The energy sector’s consolidation wave continues, The Motley Fool, November 8, 2018,
Chevron: Anadarko offer is just the beginning, Seeking Alpha, April 21, 2019,