Chevron strikes $33-billion deal for Anadarko

Company becomes second-largest major as it expands reach in booming areas

Chevron Corp. on Friday said it will buy oil and gas producer Anadarko Petroleum Corp for US$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 shatters records.

The deal makes Chevron the second-largest major by crude production, behind Exxon Mobil Corp, 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 and BP are now in a league of their own.”

These companies are turning to shale and its revolutionary techniques of fracking — blasting sand and water into formations to extract oil — because it is cheaper and produces oil more quickly than costlier offshore and LNG projects that take years to generate cash.

The shale oil-and-gas boom reversed a long-running decline in U.S. crude production, and instead propelled it to a record 12 million barrels a day ( bpd), more than Russia and Saudi Arabia. The United States is also now the third-largest producer of LNG, super-cooled natural gas that is seeing record demand as a cheaper, cleaner alternative for countries that 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 U.S. this year, according to Wood Mackenzie.

Chevron’s pledge to restrain expenditures has made it a favourite among energy stocks, with its shares up 13.8 per cent this year. It plans to sell some US$15 billion in assets over time to offset the Anadarko deal.

Chevron chief executive Mike Wirth said the deal offers a “compelling and unique fit” because the two operate in similar areas, as both have holdings in shale, offshore, and LNG projects. Chevron also expects shale to generate profits for its pipeline, trading and refining units. “We are the best company to combine with Anadarko and Anadarko is the best company to combine with us,” Wirth said.

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 Noble Energy, rose nine per cent, while Pioneer Natural Resources Co jumped 10 per cent.

Chevron and Exxon have been increasing investment in the Permian Basin, the most prolific shale oilfield 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 120-kmwide 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.

Chevron also owns mineral rights under some of the Anadarko Permian properties, saving it royalties that others would have to pay, said Drillinginfo analyst Andrew Dittmar. He estimated Chevron is paying about US$50,000 an acre for Anadarko’s west Texas holdings.

Permian producers are pumping around four million barrels per day, 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.

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, and analysts now predict another wave of consolidation as smaller shale producers react to the majors’ advance.