In accepting the new Occidental bid, Anadarko will miss out on long-term benefits offered by the original Chevron takeover – writes Marketline.

News that US shale company Anadarko had abandoned an already announced $33 billion sale to oil major Chevron marks a major reversal from a deal offering substantial financial gains. Even more surprising was the new preferred buyer, Occidental.

Anadarko Chevron Occidental deal

The Houston-based oil company is a fraction of the size of Chevron, which in 2018 achieved revenues of $158.9 billion. Last year Occidental recorded revenues of $17.82 billion, far less than that of its rival for ownership of Anadarko.

Chevron has four days from the point of termination to offer a new bid. As yet there is no word from the company about what the board will elect to do next, but if the oil major does give up on the deal Anadarko will pay out $1 billion for exercising the break clause.

Regardless of which company finally completes a buyout of Anadarko, the deal will be the largest in the global oil industry for three years and create a big player in one of the most valued drilling regions.

Chevron offered better long-term prosperity than Occidental does

For the most part, the oil majors missed out on the growth of US shale. In staking $33bn on buying Anadarko Chevron was making a big bet on the long-term future of what are considered highly lucrative assets.

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Despite being highly prized, Anadarko has consistently made significant losses over the past few years. The sheer scale of Chevron means these could be absorbed relatively easily until sustained profitability can be achieved.

Chevron offers the most direct route to such a future thanks to the massive economies of scale and ability to raise money that will be called upon.
Furthermore, oil majors are acquiring shale firms. For Anadarko, this means rivals are being targeted by other oil and gas majors, and it is reasonable to assume under the wing of a global name much smaller shale firms than Anadarko could thrive.

Had the original deal gone ahead, the newly enlarged company would have been approximately level with ExxonMobil and Shell in terms of production. Based on last year’s financials, Chevron would have generated larger revenues than ExxonMobil.

Occidental is offering more money but the business case is not so attractive

Now Occidental looks set to complete the purchase unless Chevron responds with a higher bid, questions have arisen about the buyer’s suitability. The deal takes the Texan company into new business areas and weakens the balance sheet.

Unlike Chevron, Occidental cannot so easily invest vast resources into the company to realise the profits promised by shale assets situated in the coveted Permian Basin.

Obstacles, however, remain and the deal could yet fall apart. Investors are said to be displeased by not being able to vote on the purchase, signalling the company may very well be overextending itself by taking on Chevron.