Anadarko Petroleum Corp. (APC) investors who bought the company's shares this year are about to be rewarded for their patience.
Shares of the Woodlands, Texas-based oil exploration company popped to their highest level in six months after Chevron Corp. (CVX) announced it was acquiring Anadarko in an unanticipated move aimed at accelerating the growth of Chevron's upstream portfolio.
"This transaction builds strength on strength for Chevron," said Chevron Chairman and CEO Michael Wirth. "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. It creates attractive growth opportunities in areas that play to Chevron's operational strengths and underscores our commitment to short-cycle, higher-return investments."
Chevron said it will pay $65 a share for Anadarko, which is a 39% premium to Thursday's close of $46.80 but is still 15% below Anadarko's 52-week high of nearly $76.70 last summer. Anadarko stockholders will receive 0.3869 Chevron share and $16.25 in cash for each Anadarko share, for a total of $33 billion.
As part of the deal, Chevron will issue about 200 million shares and pay approximately $8 billion in cash. Chevron will also assume estimated net debt of $15 billion as a result of the transaction. The total enterprise value of the transaction is around $50 billion.
The deal comes amid a number of macro factors signaling a rebound in global oil prices. Investors have been mindful of OPEC supply cuts, sanctions on Iran and Venezuela and escalating military tensions in Libya as major elements that will continue to support oil.
With the acquisition of Anadarko, Chevron will be better positioned amid the rebound to compete with other oil supermajors such as BP plc (BP) , Royal Dutch Shell (RDS.A) and Total SA (TOT) to take advantage of the environment.
All of these factors were picked up on by the Action Alerts PLUS team that noted the "cheap" status of Anadarko stock amid the renewed profitability of shale drilling.
"Anadarko's stock price did not reflect how well the company is doing and how much cash they are generating in this oil environment," the team wrote. "We saw plenty of reasons to hold on to this stock and take the pain. It was simply too cheap and undervalued by the market. It was only a matter of time before the market (or Chevron) recognized this, and this is the perfect example of why giving up on value is a sin."
Aside from the rebound in oil, the acquisition of Anadarko's LNG capabilities is a bonus for Chevron in light of the company's colossal LNG facility in Mozambique that is competing with ExxonMobil (XOM) to take advantage of the opportunity offered there despite security risks.
The growth in LNG is particularly notable given the increased importance of the commodity in both U.S. and international markets that are looking to transition from coal and oil dependence.
"The primary reason we like natural gas is that it is a continually growing industry," Hennessy Funds Gas Utility Investor Fund (GASFX) Ryan Kelley told Real Money. "We still have a long way to go before we switch over to renewables."
Tim Boersma, director of Global Natural Gas Markets at Columbia University's Center on Global Energy Policy, noted that Europe could be a booming market for LNG as well and likely will be more open to U.S. producers from a political standpoint.
Boersma said as Dutch production has waned countries such as Germany have become increasingly dependent on Russia and majority state-owned entities such as Gazprom (OGZPY) .
"After the investment in Nordstream 2, natural gas from Russia could reach almost 70% of German imports," Boersma told Real Money. "The imports from the U.S. could act as an insurance policy so they do not overly rely on one or two countries to supply the market."
Boersma said Germany turning to LNG from the U.S. would have the added benefit of helping reduce the country's coal power dependency, something German Chancellor Angela Merkel has stated as an objective.
"If Germany is serious about curtailing its carbon emissions, it needs an alternative to coal," he said. "Renewable and natural gas seem to be the path away from coal."
Chevron CEO Wirth said the deal will handsomely reward shareholders at Chevron, becoming accretive to cash flow just one year after it closes.
Anadarko Chairman and CEO Al Walker said the combination of Chevron and Anadarko "will form a stronger and better company with world-class assets, people and opportunities."
"I have tremendous respect for Mike and his leadership team and believe Chevron's strategy, scale and operational capabilities will further accelerate the value of Anadarko's assets," Walker said.
Chevron shares nonetheless were down 4% about an hour before Friday's opening bell.
The major question that is now intriguing investors is whether this deal will kick off a consolidation trend.
The saddest part of this news though is losing $APC as a quality trading stock. Been a favorite for years and one of my top 5. I don't want to lose any others, but I fear this may kickstart some consolidation. I don't like the $CVX $APC deal and really don't understand it.
— Oil Stock Trader (@OilStockTrader) April 12, 2019
If the arms race in other industries, such as pharmaceuticals, is any indication, that could well be the case.
Anadarko and BP Plc are holdings in Jim Cramer's Action Alerts PLUS member club . Want to be alerted before Jim Cramer buys or sells the stocks? Learn more now.
