Chevron’s Discipline Has Many Useful Outcomes

(Bloomberg Opinion) -- It seems clear now why Anadarko Petroleum Corp. opted to first take Chevron Corp.’s takeover offer a month ago: It suspected Chevron would stick to its guns.

When Occidental Petroleum Corp., which prevailed Thursday after Chevron withdrew, first unveiled its own bid, it complained Anadarko’s board had ignored its higher offers. Anadarko, recognizing Oxy’s stock would be a weaker currency and that the bidder would require a shareholder vote, had reportedly sought extra measures, such as a collar to protect against an inevitable hit to Oxy’s share price, as well as a higher cash component. Chevron, with a bigger balance sheet and no need for a shareholder vote, offered more security.

It also offered a useful foil. Chevron’s interest was to a large degree opportunistic, coming after a steep drop in Anadarko’s price. As such, the impetus to do a deal was less pronounced. Moreover, CEO Mike Wirth had spent his first year in the job repositioning Chevron as disciplined on use of capital. As such, Chevron was less likely to go all-in – as Thursday’s decision demonstrates.

Oxy, on the other hand, had been talking on and off with Anadarko for a while and had already indicated its willingness to bid higher and raise the cash portion to assuage any concerns. Net net, if Anadarko was going to get a bidding war going, it seemed far likelier that Oxy would come over the top of an agreed Chevron offer rather than the other way around. And that’s what happened, with Oxy not only tabling a higher bid, but then stretching itself and sidelining its own shareholders by avoiding a vote to raise that bid further without Chevron even making a countermove.

Anadarko managed to extract quite a bit from the past month’s drama. As of Thursday morning, it has an agreed offer in hand worth almost $76 a share, including $59 of cash, versus its closing price on April 11 of $46.80.

As for the two bidders, their performance over the past month paints an interesting picture:

Chevron’s Discipline Has Many Useful Outcomes

Oxy’s exertions, including taking high-priced financing from Warren Buffett to bolster its cash bid, enabled an unlikely victory. Yet, as I wrote here and as the stock’s performance indicates, “winning” can be an ambiguous term. More disposals such as the one struck with Total SA, along with realizing Oxy’s big synergies number, are needed in short order.

Chevron, meanwhile, loses a chance for a sweet deal but retains its reputation for discipline. The $1 billion break fee will essentially go to bolster its buyback program. Given that will in effect be paid out of the pro forma coffers of Oxydarko, there is a strange irony that some of the 8%-plus money from Buffett will find its way into buying Chevron’s 4% paper.

And the E&P sector? It sank Thursday morning. That may have more to do with trade-war fears knocking oil prices. But there might also be a touch of anti-climax about it. Consolidation is needed in shale, but Chevron’s decision suggests the majors aren’t about to go all-in. That is actually a good sign for a sector that could sorely use some discipline, even if it promises a bit less excitement.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal's Heard on the Street column and wrote for the Financial Times' Lex column. He was also an investment banker.

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