Chevron announced on Friday it will acquire oil and gas driller Anadarko Petroleum in a cash and stock deal valued at $33 billion, marking one of the biggest energy sector mergers in years and a transformative moment for one of the industry's dominant players.
The transaction will expand the second biggest U.S. energy company's operations in U.S. shale oil and gas production, offshore drilling and liquefied natural gas exports. The deal represents the 11th biggest ever for an energy and power company, according to Refinitiv.
The acquisition launches Chevron to a new competitive level, establishing the San Ramon, California-based company as a more formidable challenger to rival oil giants Exxon Mobil, Royal Dutch Shell and BP, says energy and mining research firm Wood Mackenzie. After the deal closes, Chevron will go from being the fourth biggest international oil major by production to the second largest.
"This is the biggest upstream deal since Shell and BG in 2015," said Roy Martin, senior analyst at Wood Mackenzie. "Chevron now joins the ranks of the UltraMajors — and the big three becomes the big four."
In a sign of the value the industry places on Anadarko's assets, fellow mini-major Occidental Petroleum attempted to buy the company, sources told CNBC's David Faber. Occidental was prepared to pay $70 a share for Anadarko and is currently exploring its options, the sources said.
Shares of Anadarko rose 33.6% following the news. Chevron shares were down 4.7% from Thursday's close of $125.99 a share.
Chevron's deal values Anadarko at $65 per share, a 37% premium to its Thursday close. Based on Anadarko's closing price of $46.80 on Thursday, Anadarko shareholders will receive 0.3869 shares of Chevron and $16.25 in cash for each Anadarko share. Chevron will assume $15 billion of Anadarko's debt.
"This takes a great company and makes it even better," Chevron Chairman and CEO Michael Wirth told CNBC's "Squawk Box" immediately after the news broke. "As our company has strengthened its financial situation over recent years, we're always looking to make our portfolio even stronger."
Wirth sees $65 per share as a "fair price" for Anadarko. Wirth, who assumed his role in February 2018, expects the deal will allow Chevron to "win in any environment," playing to the company's strengths in shale, deep water and natural gas. He said the company expects the deal to create over $1 billion in synergies.
"With Anadarko, [Chevron] gets relatively cheap large-scale production, taking their Permian position up a further level. They also get West and East African reserves, can roll their Australian LNG development capability into Mozambique," Mizuho Securities said in a research note.
The deal comes as oil majors like Chevron and Exxon look to carve out a dominant position in the Permian Basin, the largest U.S. shale field and the driver of a boom in American oil production.
Chevron's Permian production of oil, natural gas and associated liquids hit 16.2 billion barrels of oil equivalent (BOE) in 2018. Anadarko produces about 4 billion BOE from the Permian region in western Texas and eastern New Mexico.
The companies say the deal creates a 75 mile corridor across the Delaware Basin portion of the Permian. Stringing together continuous acreage allows companies to more efficiently carry out the advanced drilling methods needed to produce shale oil and gas.
That is at the heart of Chevron's Permian strategy. The company is bringing industrial scale to shale drilling, once the domain of small, independent wildcatters. Wirth says the company plans to accelerate activity in Anadarko's Permian fields, increasing the number of rigs and introducing highly efficient pad drilling and digital analytics solutions.
"It's not about getting bigger in the Permian," Wirth told analysts on a conference call. "It's about getting better in the Permian, and I think this makes us better in the Permian."
Chevron plans to bring its manufacturing model to Anadarko's DJ Basin fields in Colorado. The shale region is Anadarko's biggest source of natural gas production and its second biggest oil-producing region, falling just behind the Gulf of Mexico.
The deal also establishes Chevron in the midstream business, the part of the oil and gas industry that transports and processes oil and gas. Anadarko has a controlling stake in Western Midstream Partners, a master limited partnership that operates pipelines and processing plants in Texas and the Western U.S.
Those assets complement Chevron's goal of growing its Permian oil and gas production. A shortage of pipeline capacity has held back output from the shale region, making midstream infrastructure a precious asset.
Both companies are offshore players in the Gulf of Mexico. Anadarko operates 10 offshore facilities in the Gulf, which Chevron says will enhance its presence in the region, where it has six deepwater hubs.
Chevron says it sees opportunities for tie-backs to Anadarko assets in the Gulf, which involves connecting offshore fields to existing infrastructure. Drillers have increasingly turned to the low-cost strategy to avoid the massive expense of building multi-billion dollar deepwater platforms.
Still, the company will consider new large-scale developments in the Gulf, Wirth told analysts.
The deal also gives Chevron a stronger foothold in the African liquefied natural gas market. Anadarko plans to build one of the world's largest LNG export facilities in Mozambique, leveraging huge natural gas reserves from nearby offshore fields.
Chevron has deep experience developing LNG operations. The company is behind the massive Gorgon and Wheatstone projects in Australia and has a stake in the Angola LNG.
Demand for LNG — natural gas chilled to liquid form for transport by sea — is soaring as countries like China aim to meet their energy needs with gas, a cleaner-burning alternative to coal and fuel oil.
Asked on the conference call about delays to the eventual startups at Gorgon and Wheatstone, both of which are now operating, Wirth acknowledged that Chevron could have executed the projects better, saying "we've learned a lot of lessons from that." He said the company will offer insight on Mozambique LNG where it makes sense, but believes the project should proceed as planned by Anadarko.
"We like what we've seen on all the engineering and development and execution planning, and we would intend to see it through on the path that it's on," Wirth said.
The deal, which is subject to shareholder and regulatory approval, is expected to close in the second half of 2019. If approved, Chevron said, it plans to boost its annual share buyback program to $5 billion from $4 billion.
Chevron said it plans to divest $15 billion to $20 billion of assets between 2020 and 2022.
"This transaction will unlock significant value for shareholders, generating anticipated annual run-rate synergies of approximately $2 billion, and will be accretive to free cash flow and earnings one year after close," Wirth said in the company's release.
Credit Suisse Securities is Chevron's financial adviser, while Paul, Weiss, Rifkind, Wharton & Garrison is its legal adviser. Evercore and Goldman Sachs are financial advisers to Anadarko, while Wachtell, Lipton, Rosen & Katz and Vinson & Elkins LLP are its legal advisers.
Anadarko Petroleum stock has risen 6.8% this year, compared with a 17.6% increase in the S&P 500 Energy index over that period.
Watch: Full interview with Chevron CEO on plan to acquire Anadarko Petroleum
Correction: This story was revised to correct that the Thursday closing price of $46.80 was for Anadarko.
— CNBC's Michael Sheetz contributed to this report.