Chevron's Mr. Discipline Shows Costs Matter By Ending Anadarko Bid
(Bloomberg) -- Chevron Corp. Chief Executive Officer Mike Wirth’s decision to abandon his $33 billion offer for Anadarko Petroleum Corp. bolsters his reputation as one of the oil industry’s consummate financial disciplinarians.
Anadarko was looking for Chevron to beat or at least match Occidental Petroleum Corp.’s $38 billion proposal, people familiar with the matter said Wednesday. But Wirth, whose deputies already had held integration meetings with counterparts at Anadarko, declined to escalate the bidding war and bowed out on Thursday.
“Make no mistake about it, we had the financial capacity to easily outbid Occidental,” Wirth said in an interview. “But an increased offer would have eroded value to our shareholders and would have diminished returns on our capital. We’re serious about being disciplined.”
The decision to cede Anadarko to a rival one-fifth of its size would have been unthinkable even five years ago, in the heady days of $100 a barrel oil when the world’s largest energy companies were focused on growth at almost any cost. But the crude price collapse, ascendance of of shale and a recognition that big deals often destroy shareholder value has changed Big Oil’s mindset.
To underscore the fact, Chevron won’t use its $1 billion deal break fee to build a war chest for another takeover. Instead the supermajor will buy back shares in an unexciting but shareholder-friendly move. Chevron was best-performing oil stock in the S&P 500 Index with a 2.5 percent gain.
“We have no intention to do an acquisition unless it’s exceptionally good,” Wirth said.
In withdrawing Chevron’s bid for the Texas-based crude explorer, Wirth is hewing to the tightfisted investment ethos that has been the defining characteristic of his 19-year run in senior management at the company.
The University of Colorado-trained engineer and Chevron lifer rose through the ranks of the company’s sprawling, worldwide oil-refining division before succeeding John Watson as CEO in early 2018. As refining boss and one of Watson’s top lieutenants, Wirth divested underperforming plants and quit entire markets to improve profits, a model that was subsequently adapted to Chevron’s crude and natural gas unit with similar results.
“I came up through the downstream side of our business where I always believed that margins would be lower next year than they are this year and nothing you could do to control that,” he said in a February interview. “You make your own margin.”
Although acquiring Anadarko would have elevated Chevron’s output into the realm of behemoths Exxon Mobil Corp. and Royal Dutch Shell Plc, the combination may have challenged Wirth’s commitment to his self-stated primary goals: expanding dividends and limiting debt.
“Chevron just demonstrated its commitment to capital discipline and conservative financial policies by declining to enter a bidding war for Anadarko,” said Pete Speer, a senior vice president at Moody’s Investors Service. “While it has the financial capacity to match Occidental Petroleum’s offer, had it raised the cash portion of the consideration to compete with Oxy it would have materially increased its financial leverage and weakened its credit profile.”
Under Wirth’s leadership, Chevron’s return on equity surpassed that of Exxon, long the gold-standard of oil producers. On another key performance metric called the recycle ratio, Chevron also trumps its larger rival. Since his promotion to CEO last year, Chevron has surprised Wall Street analysts with better-than-forecast profits in four out of five quarters.
In capitulating to Occidental, whose CEO Vicki Hollub has coveted Anadarko for the better part of two years, Wirth may have concluded paying a higher price would have been too corrosive to returns on the investment.
The target company’s daily output equivalent to 666,000 would have immediately lifted Chevron global production by about 20 percent to 3.6 million, close to that of Exxon and Shell, according to data compiled by Bloomberg.
“Growth is an outcome. It’s not an objective,” Wirth said in the February interview. “The objective is to deliver strong returns to our shareholders.”
What Bloomberg Intelligence Says
Even with Berkshire’s $10 billion and Total buying assets for $8.8 billion when the deal closes, Occidental’s Anadarko bid is still less compelling than Chevron’s, based on what we view as elevated integration risk and a weaker asset fit. Chevron won’t match Occidental’s higher offer but will use the $1 billion breakup fee for share buybacks.
--Vincent G. Piazza and Spencer Cutter, analysts
Click here for the research
©2019 Bloomberg L.P.