Chevron’s $33 Billion Deal for Anadarko Sets Up More Shale Mergers, Expands Gulf Drilling

Industry analysts and U.S. shale watchers have been waiting for a big deal to kick off a wave of mergers, and in mid-April they got one.

Chevron agreed to buy Anadarko, one of the largest independent producers in the U.S., in a cash-and-stock deal valued at $33 billion. It was the biggest merger since Royal Dutch Shell’s $61 billion purchase of BG Group in 2016.

The deal catapults Chevron, which had lagged behind rivals such as Exxon Mobil and Shell in recent years, into the elite ranks of the “ultra majors.” It also makes Chevron the dominant player in the Permian Basin and comes after the U.S. oil output topped 12 million barrels, surpassing Russia and Saudi Arabia. Chevron said the cash flow from the combined company would have been $36.5 billion in 2018, slightly more than Exxon’s $36 billion, and its estimated production will be 3.6 million barrels a day.  

By acquiring Anadarko, Chevron is doubling down on the Permian, the world’s most lucrative oil and gas play. The company has been beefing up its assets there since Mike Wirth became CEO a year ago. The two companies will hold 75 miles of continuous acreage in the Permian’s prolific Delaware sub-basin, near the New Mexico border.

“Anadarko has a great set of assets; Chevron has a strong portfolio. You put those two together and it really is a powerhouse,” Wirth told Bloomberg News. “It’s about the Permian, but it’s about so much more than that.”

By acquiring Anadarko’s offshore properties in the Gulf of Mexico, Chevron would become a major operator there as well, rivaling Shell as the market leader.

While the Permian boom has drawn most of the headlines in the U.S. oil and gas industry during the past few years, the Gulf has undergone a quiet resurgence.

Production has increased to a record of almost 2 million barrels a day, and that is expected to increase in the coming years as more projects come online. Producers have been able to lower costs, and refiners are increasing demand for heavy crude as supplies from countries such as Venezuela have dwindled.

Average production costs in the Gulf have declined by more than 50 percent in the past five years, according to industry consultant Woods Mackenzie. Companies have further reduced expenses by concentrating new drilling near existing infrastructure such as production platforms, then linking to them with umbilicals. In addition, the industry has been lobbying the government to lower royalty payments deepwater acreage.

Shell and BP, currently two of the biggest Gulf producers, have estimated that their breakeven price for deepwater wells has fallen to $40 a barrel from $70 a few years ago. Gulf output has doubled in recent years, even though companies are using just 25 percent of the number of wells they did in the 1990s.

Shell is expected to bring its multibillion-dollar Appomattox platform off the Louisiana coast into operation later this year. Its Vito platform about 150 miles southeast of New Orleans will follow in 2021. Shell also announced its Whale discovery last year, although the company hasn’t made any development decisions on that project yet.

Meanwhile, BP has said it will spend $1.3 billion to expand its Atlantis project in the Gulf, which is already producing 300,000 barrels a day equivalent. It expects to increase that production to 400,000 by the middle of the next decade. For its part, Chevron brought its Big Foot platform online last year, and it’s developing its 2017 Anchor discovery with Total.  

And that maybe just the beginning. In March, the Trump administration rolled out a five-year plan to expand drilling in federal waters that would lift restrictions on coastal waters beyond the western Gulf of Mexico. The Bureau of Ocean Energy Management has proposed opening as much as 90 percent of the outer continental shelf to drilling, offering leases in areas such as the Atlantic Coast and California, which hasn’t been open to new drilling since the 1980s.

Despite all the light sweet crude coming out of domestic shale plays, most U.S. refiners are still tooled for the heavy sour oil from the Gulf. Although they are more expensive to drill, deepwater wells typically have slower depletion rates, giving producers more time to recoup their investment.

The biggest impact of Chevron’s deal, of course, will be onshore. Anadarko had been a perennial takeover candidate, and the only companies that could afford it were the majors. For years, rumours circulated that Exxon or Shell would make an offer.

Chevron’s price of $65 a share represents a 35 percent premium, far higher than the average of 11 percent last year or even the 22 percent average for 2017, according to Bloomberg data. Shell, in particular, has said it wants to expand its shale holdings and has reportedly been in talks with Endeavor Energy Resources LP. Endeavor is the biggest privately held producer in the Permian, and would fetch between $10 billion and $15 billion, analysts estimate.

Meanwhile, other companies on the hunt in the area include Occidental Petroleum, which CNBC reported actually made a higher bid for Anadarko, at $70 a share. The Chevron deal instantly made most other shale producers potential takeover targets.

Once the realm of smaller, independent producers, shale has become a focus for growth by the majors and larger independents. Even before it announced the Anadarko deal, Chevron had been aggressively acquiring Permian properties and said it would double its production there by 2023.

The larger companies have focused on reducing production costs in the region by developing manufacturing techniques for drilling that maximise rig usage and reduce production expense. In discussing the deal, Wirth mentioned that the large block of contiguous acreage that the deal will give Chevron enables it to “more efficiently carry out advanced drilling methods needed to produce shale oil and gas.”

With Chevron’s purchase, analysts and bankers are once again licking their chops at the prospect of more deals. A flurry of mergers a year ago was supposed to ignite an acquisition boom, but it never materialised. Now, the size and the price of the Chevron deal may finally set the wave in motion.