- Chevron enters the history books with the sixth-largest oil and gas deal in history.
- The energy giant will pay $33 billion — $50 billion including debt — to acquire Anadarko Petroleum.
- The deal will expand Chevron's footprint in the largest U.S. shale field, grow its Gulf of Mexico operations and expand its LNG portfolio.
Start in Texas, where Chevron will expand its presence in the top U.S. shale field. Then trace a line to the Gulf of Mexico, where the energy giant will grow its offshore drilling operations. Next, skip across the Atlantic to southern Africa, where Chevron will acquire a massive natural gas export project that's currently under development.
The $33 billion blockbuster acquisition — $50 billion including debt — ranks as the sixth-largest oil and gas deal on the books, according to Drillinginfo and Dealogic. It's the largest deal since 2015, when Royal Dutch Shell bought British energy giant BG Group for $82 billion in enterprise value.
Here's why Chevron thinks Anadarko is worth the record-setting price tag.
Shale drilling, or extracting oil and gas from rock formations, is fueling a boom in U.S. production. Small, independent drillers pioneered U.S. shale production, but the new rule is "the shale game is a scale game," according to Chevron CEO Michael Wirth.
Now that the industry has refined technologies such as hydraulic fracturing and horizontal drilling, the next frontier is industrializing the shale process. That's where companies such as Chevron come in.
Oil majors have the scale and financial wherewithal to essentially turn shale fields into factories. They do that by stringing together large parcels of continuous acreage, which allows them to do highly efficient pad drilling on a massive scale. Pad drilling involves drilling multiple horizontal wells from a single location.
Chevron says it can produce oil and gas from a one-square-mile area from a single drilling pad. On Friday, Chevron highlighted that the Anadarko deal creates a 75-mile-wide corridor in the Delaware Basin portion of the larger Permian Basin, the biggest U.S. shale field.
The 2014-2016 oil price crash sparked a land rush in the Permian, where drillers can produce crude at low breakeven costs compared with other regions. With the best land spoken for, energy companies are now turning to mergers and acquisitions to enhance their positions in the region underlying western Texas and eastern New Mexico.
That's illustrated in the Chevron-Anadarko deal, which connects a large patch of Chevron's Permian acreage in Culberson County, Texas, with Anadarko's holdings in neighboring Reeves and Loving counties. Wirth says Chevron plans to add more rigs, expand pad drilling and introduce his company's digital analysis to the Anadarko-held land.
"Clearly, a large driver of the deal is Anadarko's prized position in the Delaware Basin where Chevron increases its position by 240,000 net acres to over 1,400,000 net acres," said Andrew Dittmar, a mergers and acquisitions analyst at Drillinginfo. "The Delaware Basin currently provides the best well economics of any shale play in the country."
According to sources, Occidental Petroleum also sought to snap up Anadarko. Occidental operates around the world, but its U.S. operations are focused on the Permian — including in the Delaware Basin sub-region that Chevron highlighted.
The Chevron deal will likely prompt oil majors to consider purchases of Permian players like Pioneer Natural Resources, EOG Resources and even Occidental, said Dan Eberhart, CEO at oilfield services firm Canary.
"Chevron buying Anadarko is the first in a series of takeovers as oil companies rush to scale to make shale work," Eberhart said in an email. "It is nearly always cheaper to drill for oil on Wall Street than in the oil patch."
Wirth also thinks Chevron can put its scale game to work in Colorado, where Anadarko has 400,00 acres of continuous acreage in the core of the DJ Basin, another major shale region.
While the market was largely focused on the Permian on Friday, the DJ Basin actually makes up a bigger part of Anadarko's portfolio. It is Anadarko's biggest source of natural gas sales and its second-biggest oil-producing region.
Analysts say those assets, along with acreage in other parts of the U.S., shouldn't be overlooked.
Chevron's "announcement to acquire [Anadarko] displays further commitment to US onshore development, adding a highly-scalable position in the Delaware but also the DJ and Powder River basins," Justin Lepore, senior associate at RS Energy Group, said in an email.
Chevron currently has six deepwater hubs in the Gulf of Mexico. Once the deal closes, that number will increase to 16 facilities.
Those assets also complement each other. Chevron points out that many of the platforms are within a 30-mile radius of the two companies' deepwater acreage. That creates an opportunity to produce offshore oil and gas by connecting fields to existing hubs, rather than investing in expensive new infrastructure.
Companies are increasingly using these so-called tiebacks to keep costs down. Wirth declined to name specific tieback opportunities, but noted that Chevron has recently made several discoveries that could be candidates.
Like other oil majors, Chevron is betting big on liquefied natural gas, a form of the fuel super-chilled to liquid form for transport on tankers. The company has two massive LNG facilities in Australia and a stake in southern Africa's Angola LNG, and it plans to develop another project in British Columbia.
The Anadarko deal will add to that position with Mozambique LNG, a project under development that will take advantage of a giant gas field off the coast of Mozambique. Anadarko is close to greenlighting the project, which has already locked up customers in some of the biggest LNG markets around the world.
"Mozambique offers attractive long-term growth and diversification opportunities for Chevron's LNG portfolio," said Frank Harris, vice president for LNG consulting at energy and mining research firm Wood Mackenzie.
Chevron is one of the biggest integrated oil companies in the world, with operations spanning the upstream oil and gas production business and the downstream refining and chemicals segment. But the company is not a big player in the midstream business, which involves transporting and processing oil and gas.
That changes with the Anadarko deal. The acquisition will make Chevron a majority stakeholder in Western Midstream Partners, a master limited partnership that operates pipelines and other midstream infrastructure that runs from the Gulf Coast in Texas, up through Colorado and neighboring states as far north as Wyoming.
"Chevron has been noticeably absent in the midstream rush of the past couple of years. It now takes a 55% stake in Western ... which goes a long way toward fixing that," said RT Dukes, research director for Lower 48 oil and gas at Wood Mackenzie.