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Our team shares a two-part analysis on the proposed acquisition
of Anadarko Petroleum by Chevron, including a view of upstream
competition and the onshore US assets.
Key implications for a Chevron acquisition of
Anadarko
"The bottom line—It's about scale. Overall, the acquisition
is premised on creating further scale within Chevron's focus areas,
and the addition of Anadarko would provide Chevron with a portfolio
that complements the company's existing strategy," says Chris
DeLucia, CFA, associate director, companies and transactions
research, IHS Markit.
Chevron's proposed $58 billion (equity value plus liabilities)
acquisition of Anadarko would be the largest upstream-focused
corporate transaction since Shell's acquisition of BG in 2015 and
would be the fourth-largest on record. Based on the current offer
metrics and preliminary IHS Markit estimates, the transaction would
be slightly accretive to Chevron's appraised net worth.
The strategic rationale for the transaction is aimed at
providing additional scale for Chevron within U.S. unconventionals,
global deepwater and LNG. In the U.S. Lower 48, Anadarko's Permian
Basin portfolio would supplement Chevron's existing footprint in
the Permian's Delaware Basin, while adding a new position in the
Denver-Julesburg Basin. Based on IHS Markit's current projections
for both companies, net U.S. unconventionals output from the
pro-forma company could reach 2 million barrels-of-oil-equivalent
(BOE)/day by 2025.
Deal will establish Chevron as a Permian powerhouse. For
Chevron, the addition of Anadarko's U.S. onshore portfolio would
supplement its existing position in the Permian Basin, which is
increasingly becoming the company's primary focus area. Chevron's
current Permian acreage is adjacent to some of Anadarko's in
southwest Lea County and north-central Loving County. On a
gross-production basis, the combined company would be the second
largest Permian producer, a size and scale that should offer cost
and operational synergies, which is increasingly important in the
hyper-competitive Permian Basin.
Deal makes Chevron a Global Integrated leader. For Chevron, the
addition moves the pro-forma entity toward the top of the Global
Integrated peer group on the basis of production volumes. Current
IHS Markit forecasts point to net output of 4.8 million BOE/day for
the combined company by 2025, trailing only ExxonMobil's 4.9
million BOE/day at that time, but ahead of BP's estimated 4.5
million BOE/day. In 2018, Chevron ranked fourth among the Global
Integrated companies in terms of net-entitlement volumes; the
pro-forma company would have ranked third. (However, this growth
outlook is subject to upcoming asset sales, with Chevron targeting
$15 billion—$20 billion in divestitures through 2022, should
the transaction close.
Figure 1: Global integrateds: Total worldwide
production
Chevron could become a leader in U.S. unconventionals by 2025.
Driven by Chevron's target of 900,000 BOE/day of net output from
the Permian Basin by 2023, IHS Markit estimates that combined U.S.
unconventionals output from the two companies could reach 2 million
BOE/day by 2025, making the company the largest producer in the
U.S. unconventionals space among the multi-jurisdiction group of
companies, well ahead of ExxonMobil's 1.5 million BOE/day by that
time.
For Anadarko, in the U.S. onshore, which accounted for 65 percent
of its output at year-end 2018, the company's portfolio is
currently centered on its core DJ Basin (272,000 BOE/day in the
fourth quarter 2018) and Permian Basin (127,000 BOE/day) positions.
These two core positions are supplemented by production from the
Greater Natural Buttes of Utah and Powder River Basin in Wyoming.
IHS Markit is currently forecasting production growth from both the
DJ Basin and Permian Basin positions, with Anadarko's net U.S.
unconventional output expected to reach 800,000 BOE/day by the
middle of the next decade.
Figure 2: US unconventionals oil and gas production among
multijurisdiction companies
Don't forget the growth. Aside from scale, this deal would
deliver growth. On a pro-forma basis, the combined Chevron/Anadarko
would also be the highest growth portfolio among the peer group,
with IHS Markit forecasting growth at a 4.1% Compound Annual Growth
Rate (CAGR) between 2018 and 2025, for the combined company (ahead
of second-ranked ExxonMobil's 3.6% CAGR during that time).
Anadarko's portfolio would also supplement Chevron's deepwater
U.S. Gulf of Mexico footprint. Anadarko's position in the play is
largely centered on its operated hubs in the Miocene/Miocene
sub-salt, which provide an array of short-cycle tieback
opportunities and sustained free cash-flow potential. Notably, this
position complements Chevron's growth opportunities in the Gulf of
Mexico, which are centered on its Lower Tertiary and
Jurassic-Norphlet positions.
Anadarko's portfolio would also provide a growth opportunity
within LNG. The Mozambique LNG project is nearing a final
investment decision, and progress on this development would provide
Chevron with a new growth option in its LNG portfolio following the
recent wave of operated Australian LNG developments that have come
onstream in the last few years.
"For some time, we've been predicting consolidation in the North
American E&P sector as companies seek to increase efficiencies,
strengthen their balance sheets and create new avenues for growth.
Relatively low valuations and an improved oil-price environment
could create the catalyst for additional M&A. We anticipate
more M&A (merger & acquisition) deals will follow, as the
chess game continues with the majors flexing their muscles and
leveraging their cashflows," says DeLucia.
A Closer Look at the US Onshore Lower 48
Assets
Chevron would nearly triple its U.S. onshore production through
the acquisition of Anadarko. Anadarko's specialization during the
past few years has been extreme. Chevron is buying two U.S. onshore
assets in the Anadarko deal—the Permian Delaware Sub-basin and
the Wattenberg/Powder River.
In the Permian:
Running with the Wolves—Both Anadarko and Chevron are tied
to the Permian, with the Wolfcamp Delaware comprising 47% and 52%,
respectively, of the company's 2018 U.S. onshore wedge portfolio.
Combined, the two companies account for just over 10% of the
Wolfcamp Delaware wedge production, second only to the plays'
current leader, EOG, which accounts for about 14% of the plays'
wedge for 2018.
Figure 3: Anadarko and Chevron gross operated production
from US onshore plays
Anadarko wells in the Delaware Basin underperformed when viewed
in terms of peak-month production. However, Anadarko has choked
back wells and 12-month average rates are much more competitive
with basin leaders. Chevron's Delaware Basin assets have performed
in the middle of the pack historically, but have improved
materially in recent quarters.
Both companies are utilizing completions with above average
intensities, leaving little room for improvement, in the near-term,
from a change in the frack recipe.
50% of Anadarko's Permian position should yield wells falling
into the 2nd and 3rd quintiles of historical
Delaware Basin performance. Considerable running room remains at 12
wells per section—the asset is only 12% developed.
"In terms of well productivity in the Permian Delaware,
Anadarko's relatively low peak-rate is offset by lower declines,
resulting in impressive break-evens," explains Lauren Droege,
senior research analyst, plays and basins, IHS Markit.
In the DJ Basin:
The Wattenberg is a solid asset and Anadarko is one of two
dominant players. (Chevron has no currently producing properties in
the Rockies.) However:
Wattenberg well results have not improved (for any company).
The play continues to deliver roughly the same distribution of
results, despite changes in proppant intensity.
Senate Bill 181 in Colorado will have implications relative to
the amount of room left in the play. While the Wattenberg is
heavily drilled with verticals, recovery as low as 2% to 3% for
vertical wells means that there a significant number of remaining
horizontal locations.
Wattenberg operators are in full development mode and Anadarko
is averaging 365 ft. to 400 ft. of spacing between wells, with
significant vertical offsets between neighboring wells. An estimate
of 12 wells per section indicates that 65% of potential locations
are currently producing.
"The lack of response to enhanced completions in the Wattenberg
leads to flat productivity for the Anadarko wells, but average
wells work at $60, as Anadarko's fee ownership greatly improves
economics by eliminating royalties," says Imre Kugler, associate
director, plays and basins, IHS Markit.
