By Claudia Assis, MarketWatch
Chevron Corp. won Wall Street kudos for knowing when to walk away from a deal.
Chevron /zigman2/quotes/205871374/lastsale CVX -9.95% stock was one of two S&P 500 index /zigman2/quotes/210599714/realtime SPX -3.37% energy stocks notching gains on Thursday, the other being shares of Diamondback Energy Inc. /zigman2/quotes/201200230/lastsale FANG -8.02% , a likely deal target once the dust from an Occidental Petroleum Corp. /zigman2/quotes/207018272/lastsale OXY -9.51% and Anadarko Petroleum Corp. deal settles.
Occidental shares dropped more than 5% and were poised to end at their lowest in 10 years.
Chevron earlier Thursday said it would not raise its bid for Anadarko, citing costs and the need for capital discipline and leaving the door wide open for Occidental to snap up Anadarko — and its shale-rich oil and gas holdings in Texas, U.S. deep-water fields, and a smatter of liquefied natural-gas projects.
That ring of caution got lauded, and shares rose accordingly, despite pressure on broader markets and a 250-point fall for the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA -4.06% and mounting equity losses on ongoing trade tensions between the U.S. and China.
“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.
Chevron has “financial capacity” to match Occidental’s offer, but if it had raised the cash portion of its own offer to compete with Occidental, it would have “materially increased its financial leverage and weakened its credit profile,” he said.
Occidental on Sunday tweaked the mix of its cash and stock offer for Anadarko to $59 a share in cash, upping the cash part. Its previous offer had been 50/50 cash and stock.
In addition to sweetening the pot and getting Chevron out of the running, the move, which implies the creation of new Occidental shares, would bring the deal to under 20% of existing Occidental’s shares, thus eliminating the need for shareholder approval. Opposition to the deal was brewing among some large Occidental shareholders.
Through a spokesperson, Occidental said it was looking “forward to signing a merger agreement with Anadarko and realizing value for our stakeholders as soon as possible.”
Chevron avoided what could have been “a protracted bidding war” for Anadarko, with the side benefit of signaling to the market that Chevron is highly cost-focused and not willing to win the bid at any price,” Stewart Glickman, an analyst with CFRA, said in a note.
To fund the deal, Occidental got a $10 billion investment commitment from Berkshire Hathaway Inc. /zigman2/quotes/200060694/lastsale BRK.B -2.31% and has agreed to sell assets in Africa to France’s Total SA /zigman2/quotes/201824152/lastsale TOT -0.48% for $8.8 billion pending the Anadarko deal.
The deal may not require shareholder approval anymore, but a larger-than-typical “against” votes could damp enthusiasm by other exploration and production companies when making large deals that do not require shareholder approval, analyst at SunTrust said in a note.
Chevron, which boosted its share buyback program by $1 billion to $5 billion, $1 billion being the termination fee it is owed when Anadarko officially calls off the deal, and is likely to remain on the prowl, the SunTrust analysts said.
Besides Diamondback, potential targets include Concho Resources Inc. /zigman2/quotes/208942254/lastsale CXO -6.00% , Pioneer Natural Resources Co. /zigman2/quotes/206736173/lastsale PXD -7.65% , PDC Energy Inc. /zigman2/quotes/202777853/lastsale PDCE -19.26% , Parsley Energy Inc. /zigman2/quotes/200138201/lastsale PE -8.89% , and Noble Energy Inc. /zigman2/quotes/210375673/lastsale NBL -13.69% , mostly given their holdings in Texas’ Permian Basin.
Chevron will “probably” buy something else, analysts at Raymond James said. But it would do well in eschewing “megamerger” and considering smaller, geographically targeted deals, the analysts said.
Chevron shares have lost 6% and shares of Occidental have lost 31% in the past 12 months, contrasting with gains around 5% for the S&P 500.