Occidental's Purchase Of Anadarko Isn't A Permian Oil Purchase

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About: Anadarko Petroleum Corporation (APC), OXY, Includes: CVX, PE, RDS.A, RDS.B, TOT, WES
by: Laura Starks
Summary

Permian oil production represents only 10-15% of Anadarko’s production, so it is less the acquisition centerpiece than has been suggested.

The SEC PV-10 value of Anadarko’s reserves is $17.1 billion. While the acquisition includes other assets, at $38 billion, the price tag is much more than the SEC reserve value.

Occidental’s contingent sale of Anadarko’s African assets to Total is a good first step in integrating the two companies.

The competition between Occidental (OXY) and Chevron (CVX) to buy Anadarko Petroleum (APC) lit up news boards and markets everywhere during the last month. Occidental won the company at a price tag of $38 billion. In some places, the competition was styled as an effort to attain dominance in the giant U.S. Permian oil basin.

I disagree with this characterization for two reasons. A) 48% of Anadarko's 2018 U.S. production was natural gas and natural gas liquids. B) Of its oil, most of Anadarko's reserves and production are not in the Permian basin: they are international, in the Gulf of Mexico, or in the D-J (Colorado) basin.

Brief Company Summaries

Anadarko Petroleum was founded in 1959 and has been headquartered in the Woodlands, Texas. In early 2019, its market capitalization was $21.5 billion, so shareholders just got a big boost, as the stock price chart below shows. The company employs 4,700 people full-time.

Anadarko explored for oil and gas in Colorado, Utah, Wyoming (the Denver-Julesburg or D-J basin), the Gulf of Mexico, the Permian Basin (Delaware sub-basin) and Africa (Algeria, Ghana, and Mozambique).

Chart Data by YCharts

Occidental Petroleum's market capitalization is $40.6 billion at a May 15, 2019, closing stock price of $54.25/share. Its enterprise value is $50.1 billion. The company's current dividend yield is 5.75%.

Anadarko's Production and Reserves

At the end of 2018, Anadarko's proved reserves were 1.47 billion barrels of oil equivalent (BOE), of which 1.13 billion BOE was proved developed. For the year, the company added 284 million BOE of reserves "organically" (through drilling).

As always: a barrel of oil equivalent is not the same as a barrel of oil. It is lower-valued because it includes lower-valued natural gas and natural gas liquids.

Anadarko's SEC PV-10 was $17.1 billion. U.S.-only reserve value was 82% of the total.

The company's first-quarter production was 715,000 BOE/D. The remaining analysis uses 2018 average numbers from the company's 10-K because its first-quarter report does not break down U.S. production by region.

Dividing 2018 production by type shows that of an average of 666,200 BOE/D:

  • 44% was U.S. oil
  • 14% was international oil
  • 15% was natural gas liquids (95% in the U.S.)
  • 27% was natural gas

Subtracting out the international production to look at the U.S. production of 570,000 BOE/D only:

  • 52% was U.S. oil
  • 17% was natural gas liquids
  • 31% was natural gas

Anadarko's fourth-quarter production was 701,000 BOE/D. In the fourth quarter of 2018:

  • 58% of this production or 407,000 BPD was oil receiving $59.86/barrel
  • 15% of this production or 108,000 BPD was natural gas liquids receiving $28.20/barrel
  • 27% of this production or 186,000 BOE/D was natural gas receiving $3.14/MCF or $18.84/BOE

The company's fourth-quarter 2018 production was 701,000 BOE/D. Geographically, fourth-quarter 2018 production divides:

  • 272,000 BOE/D (42%) in the D-J (Colorado) basin, with oil of 102,000 BPD (25.6% of all oil)
  • 142,000 BOE/D (22%) in the Gulf of Mexico, with oil of 120,000 BPD (30%)
  • 127,000 BOE/D (20%) in the Delaware (West Texas) sub-basin, with oil of 75,000 BPD (18.8% of all oil)
  • 102,000 BOE/D (16%), assumed all oil (25.6%), from international operations

Thus, focusing on just Permian oil, Anadarko's fourth-quarter Permian oil production was 75,000 BPD or only about 11% of the company's total production of 701,000 BOE/D. So, again, Occidental's purchase of Anadarko is not primarily a purchase of Permian oil.

Anadarko also has a production challenge, in that 42% of its production is coming from the D-J basin, and Colorado's oil and gas regulations are tightening up to limit that production.

Competitors

Offshore in the Gulf of Mexico and internationally in Algeria, Anadarko has competed with much bigger national oil companies like Saudi Aramco and Petrobras (PBR) and international oil companies, such as BP (BP), Exxon Mobil (XOM), Shell (RDS.A) (NYSE:RDS.B), and Chevron (CVX).

Anadarko's Permian competitors were shown in a Wall Street Journal chart last week. The top blue bar is Chevron at about 350,000 BOE/D. The second is Occidental at about 325,000 BOE/D. Anadarko is the blue bar toward the bottom at about 100,000 BOE/D.

Many companies produce more oil and gas (barrels of oil equivalent) in the Permian than Anadarko. These include Pioneer (PXD), Apache (APA), Exxon Mobil, Cimarex (XEC), Parsley Energy (PE), and Shell.

Governance

As of April 1, 2019, Institutional Shareholder Services ranked Anadarko's overall governance as a 7. Sub-scores were 1 in audit, 2 in board, 9 in compensation, and 5 in shareholder rights. In this ranking, 1 indicates lower governance risk and 10 indicates higher governance risk.

Management Issues

While it is heartening to see Vicki Hollub break the glass ceiling as a major public oil company CEO like somewhat similar counterparts at Oil States International (OIS) and Nine Energy Service (NINE), it is her results that got her the top job, and it is on the basis of her results that her acquisition of Anadarko will be judged. Indeed Jennifer Deckard is no longer the CEO of sand company Covia (CVIA) after its poor results.

Issues concerning Anadarko that have come up presently or in the past are:

  • In 2010, Anadarko was a 25% partner with BP in the Macondo well explosion. All claims have been settled.
  • A leak from one of Anadarko's abandoned lines in Firestone, Colorado, exploded, causing two deaths.
  • Anadarko has also been contending with a figuratively toxic environment in its Denver office, with several cases of sexual harassment and discrimination reported. Two of the executives named have left the company; one, Brad Holly, is now the CEO of Whiting Petroleum (WLL).
  • Anadarko's CEO and some executives negotiated increased pay just before the original takeover was announced.
  • With Anadarko's 42% of production in and around Colorado, Occidental is acquiring substantial D-J reserves just as Colorado has passed Senate Bill 19-181, which will limit oil and gas production in the state.
  • Hollub lined up 8% financing of $10 billion from Warren Buffett, considerably more than the 5.75% dividend paid to Occidental's shareholders.
  • The deal to buy Anadarko was structured such that Occidental does not require its shareholders' approval.
  • Chevron receives a $1 billion breakup fee from Anadarko.
  • Occidental is integrating a company of about equal size into its operations.
  • Finally, based on the deal price compared to the present value of Anadarko's reserves, Occidental appears to have overpaid for Anadarko's reserves and assets.

A quick glance at the stock price charts of Occidental and Chevron reveal investors' differing assessments of the two companies' "success" in buying or not buying Anadarko.

Chart Data by YCharts

Chart Data by YCharts

Management Accomplishments

Hollub has lined up an $8.8 billion sale of Anadarko's African assets to Total (TOT). These were valued at $3.0 billion in the company's 2018 PV-10 SEC reserves assessment. This not only brings in cash but also relieves Occidental of the necessity of investing in Anadarko's Mozambique gas find.

The value of oil production from the Gulf of Mexico has not really been highlighted, nor has the value of Anadarko's midstream partnership, Western Midstream Partners (WES). Analysts have estimated that WES, too, could be sold for several billion dollars.

West Texas Intermediate (WTI), $/barrel, credit: Macrotrends.net

The WTI crude price closed at $62.14/barrel on May 15, 2019. As a change in perspective, the above chart shows a 70+ year chart of inflation-adjusted oil prices.

Valuation Per Flowing Barrel

At its purchase price and using the first-quarter 2019 production rate of 715,000 BOE/day and 412,000 BPD of oil with the price Occidental is paying gives a sizeable $53,100/flowing BOE and a steep $92,200 per flowing barrel of oil. The company's (pre-acquisition) February 2019 metric was $30,670/flowing BOE and $52,800/flowing barrel of oil.

Anadarko Financial Highlights

The company's 2018 revenues were $13.4 billion, more than its $11.9 billion in 2017.

Net income was $615 million (earnings per share of $1.20) compared to a loss of -$456 million in 2017.

Recommendations

Dividend investors interested in large Permian oil producers may want to consider multinational companies with exposure there such as Chevron (3.91% dividend), Exxon Mobil (4.33% dividend) or Shell (5.92% dividend).

Investors interested in takeover targets can be assured that virtually every company smaller than a major with Permian production has been mentioned as a target. I recommend carefully parsing reserves and production for its gas/NGL/oil mix in any target company.

Disclosure: I am/we are long BP, CVX, NINE, PE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.