Analyst: Chevron-Anadarko deal is beginning of upstream wheeling and dealing
By Mella McEwen, MRT.com/Midland Reporter-Telegram Published 3:39 pm CDT, Sunday, April 21, 2019
Analysts who study the oil and gas industry had been in suspense for months. They watched as crude prices sank 40 percent in the fourth quarter of 2018, which, combined with Wall Street’s insistence on free cash flow instead of growth, sent energy merger and acquisition activity to 10-year lows.
“It’s been really quiet,” Clark Sackschewsky, tax managing principal for BDO, said in a phone interview from his Houston office.
“I felt the other shoe was going to drop,” said. And drop it did 10 days ago, when Chevron announced plans to buy Anadarko Petroleum for about $33 billion.
“My expectation is, this is the beginning, and it’s exciting to see the beginning,” Sackschewsky said.
He said that what fuels that expectation is the fact that Chevron was not the only bidder for Anadarko. Occidental Petroleum was also in the hunt for the company.
“The fact that Occidental was in the mix means they’ve got cash and are ready and set for a deal. This says another major deal could be coming,” he said.
Also fueling his expectations is the positive reception the deal received from Wall Street.
“These never come in just one deal,” Sackschewsky said. “They come in twos or threes.”
The Chevron-Anadarko deal likely fueled a sense of competition among their peers, he said.
“Chevron jumped up to No. 2, passing three other companies. Those companies won’t like being passed over. Too, ExxonMobil is saying ‘You guys are getting too close,’” he said.
The Chevron-Anadarko deal opens up a lot of capital to come into the region and into the energy industry, he said. He pointed out that in announcing the Anadarko acquisition, Chevron also announced it will divest $15 billion to $20 billion in assets.
“You know smaller buyers will want to buy those assets, and with all that coming onto the market, there will be good prices,” Sackschewsky said.
“A key aspect of how to make money in the oil and gas business is to either produce it or sell assets. If you can get a better price by selling assets than by building them, that’s what you do,” he said.
What happens moving forward – whether more majors acquire Permian Basin-focused independents or large independents -- remains to be seen, he said. “The big boys have to figure out what they want to do first,” he said.
Of the changes, he said, “I look at it like the automobile industry in the early 1900s. There were a lot of independent companies making one to three cars at a time. Then Ford came in, put a factory in place, introduced automation and mass production. The Permian Basin is at the point where operators have to put in factories. They need scale. They need the majors who have that level of standardization and they need acreage. As more major deals take place, there will be additional shedding of non-core non-contiguous assets. It doesn’t mean they don’t make oil, they just don’t fit in the majors’ structure.”
There will continue to be a place for smaller independents, he said, but the threat is, plans by the majors to ramp up their production. ExxonMobil and Chevron alone are looking to produce a combined 2 million barrels a day from their Permian Basin holdings by 2023.
Sackschewsky said that such growth in production threatens to eat up all the additional pipeline capacity expected to come online by 2021, leading to more capacity constraints, which would hurt the independent operators.