Chevron to buy Anadarko in $50bn deal: Update2

Adds comments, details on the transaction.

Chevron has agreed to acquire US upstream independent Anadarko in a $50bn deal, including debt, adding scale to boost profitability and keep costs in check in a volatile oil market.

The transaction will boost Chevron's leading position in the US Permian basin and give it access to Mozambique's fledgling LNG sector. It marks the oil industry's biggest acquisition since Shell paid $54bn in cash and shares for the UK's BG in 2016.

Chevron produced over 2.9mn b/d of oil equivalent (boe/d) last year and Anadarko's output was almost 670,000 boe/d. The enlarged firm will be almost on a par with Shell in terms of production, based on 2018 figures.

Following the takeover, Chevron expects to realise operational cost savings of $1bn/yr through synergies. And it expects to lower the combined firms' capital expenditure (capex) by $1bn/yr.

"The combination of Anadarko's premier, high-quality assets with our advantaged portfolio strengthens our leading position in the Permian, builds on our deepwater Gulf of Mexico capabilities and will grow our LNG business," Chevron chief executive Michael Wirth said.

The takeover will allow Chevron to "create a 75-mile-wide corridor across the most attractive acreage in the Delaware basin, extending Chevron's leading position as a producer in the Permian", the company said.

The large contiguous acreage will allow Chevron to increase output while improving productivity and keeping costs in check. It plans to increase activity in Anadarko's Permian acreage. Chevron will accelerate pad drilling, which Anadarko has just begun. It plans to more than offset the rise in Permian capital by removing overlap and by focusing on projects that generate best returns.

Despite the purchase of the large acreage, Chevron says its Permian operations will still be cash flow positive next year, as per its earlier guidance.

"It is not about getting bigger in the Permian, it is about getting better in the Permian," Wirth said. "If you liked Chevron's Permian position before, you will like it even more now."

Besides the onshore unconventional operations, the merger will bring together the third- and the fourth-largest producers in the US offshore Gulf of Mexico, Wirth said. This will increase the scale of operations and lead to more more capital efficient tie-back opportunities.

Anadarko had been on the verge of a final investment decision for its 12.88mn t/yr Mozambique LNG plant, based on gas reserves in the area 1 licence in the prolific Rovuma basin. Chevron will gain "another world-class resource base in Mozambique to support growing LNG demand", it said. "Area 1 is a very cost-competitive and well-prepared greenfield project close to major markets."

Chevron will allow the ongoing development of the Mozambique facility as per current plans.

"We are happy with the way it is structured. They have done a terrific job," Wirth said. "I will not try to go back and revise history. We are strongly supportive of it."

Chevron will inherit a somewhat limited portfolio of South American exploration assets. In Brazil's pre-salt play, Anadarko has operating stakes in two blocks. The company has been seeking to sell its Brazilian assets since at least 2014. In Guyana, Anadarko suspended exploration work on its offshore Roraima block after a research vessel was intercepted by the Venezuelan navy, which claims sovereignty over the territory. Anadarko also has interests in Peru and Colombia.

Overall, the combined company's production growth rate during the next five years is expected to be consistent with Chevron's prior guidance of 3-4pc/year, including reductions in the asset sales already in the public domain.

Chevron has set a new asset sales target of $15bn-$20bn in 2020-22. Its previous divestment program was $5bn-$10bn in 2018-20, which it now plans to achieve by the end of this year, one year ahead of schedule. The firm will use the proceeds to "further reduce debt and return additional cash to shareholders".

Chevron will pay $33bn in cash and shares and will assume Anadarko's $15bn of net debt. The deal is structured as 75pc stock and 25pc cash.

Chevron plans to increase share buybacks to $5bn/yr from $4bn/yr once the transaction has closed. The buybacks will help offset the equity component of the deal. The company expects the deal to generate $2bn/yr in operating cost and capital synergies.

The transaction, which is subject to Anadarko shareholder and regulatory approvals, is expected to close in the second half of the year.

"We know how to do Permian, deepwater and LNG," Wirth said. "We will be leaner and more focused."

The deal potentially sets the stage for more consolidation in the industry as investors want companies to improve efficiencies and boost returns.